Question
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 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
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