The firm has a debt obligation of 198 due at t=1. The current asset value is 193; that is, the firm is under financial distress.

The management believes that the asset value is most likely to remain at 193 at t=1 and the firm would go under.

The firm has an investment project at the present time that requires 19 as initial investment.

The value of the project has a 45% chance to become 29 (that is, a gain of 10) and a 55% chance to become 7 (that is, a loss of 12).

The WACC for the project is 30 percent. If the firm invest in the project, what is the expected cash flow at t=1 for shareholders?

Select one:

a. $1.00

b. $1.32

c. $2.25

d. $2.97

Feedback The correct answer is: $2.25