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please calculate it by steps Question 2: Economists estimate that a good business environment and a bad business environment are equally likely for the coming
please calculate it by steps
Question 2: Economists estimate that a good business environment and a bad business environment are equally likely for the coming year. The managers of ABC Company must choose between two mutually exclusive projects. Assume that the project ABC firm chooses will be the firm's only activity and that firm will close one year from today. ABC Company is obligated to make a 500 OMR payment to bondholders at the end of the year. The projects have the same systematic risk but different volatilities. Consider the following information related to the two projects: (2+2+1 = 5 Points) Economy Probability Low-Volatility High-Volatility Project Payoff 0.50 500 OMR 100 OMR 700 Project Payoff Bad Good 0.50 800 A) What is the expected value of the firm if the low-volatility project is undertaken? What if the high value project is undertaken? Which of the two strategies maximize the expected value of the firm? (2 Points) B) What is the expected value of the firm's equity if the low- volatility project is undertaken? What is it if the high value project is undertaken? (2 Points) Which project would ABC Company's stockholders prefer? Explain. (1 Point) Step by Step Solution
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