Phil plc and Costas plc are identical firms except that Costas is more levered. Both companies will remain in business for one more year. The economy is has recently been expanding. According to consensus forecasts, the probability of the continuation of the current expansion is 60% for the next year, and the probability of a recession is 40%. If the expansion continues, each firm will generate profit before interest and taxes of 2 million. If a recession occurs, each firm will generate profit before interest and taxes of 800,000. Phils debt obligation requires the firm to pay 750,000 at the end of the year. Costass debt obligation requires the firm to pay 1 million at the end of the year. Neither firm pays taxes. Assume a discount rate of 15 per cent. What is the market value of (i) Phil plc and (ii) Costas plc?

Select an answer and submit. For keyboard navigation, use the up/down arrow keys to select an answer.

a

(i) 1,321,739 and (ii) 1,153,435

b

(i) 1,530,435 and (ii) 1,530,435

c

(i) 1,321,739 and (ii) 1,321,739

d

(i) 1,530,435 and (ii) 1,321,739

e

None of the above