Question
In: Finance
ATC has a value of $98,000 in a normal economy and $87,000 in a recession. The...
ATC has a value of $98,000 in a normal economy and $87,000 in a recession. The firm has $90,000 of debt. The probability of a recession is 18 percent. The firm is considering a project that would change the firm values to $105,000 in a good economy and $92,000 in a recession. If the firm accepts this project, the firm value will ______ and shareholder value will ______.
Multiple Choice
increase by $6,640; increase by $6,100
increase by $12,000; increase by $12,000
increase by $2,000; increase by $2,000
decrease by $2,000; decrease by $1,000
increase by $6,640; increase by $6,640
Solutions
Expert Solution
increase by $6,640; increase by $6,640
| Step-1:Calculation of existing firm value and Shareholders value | |||||||
| State of economy | Probability of state of economy | Value | |||||
| a | b | a*b | |||||
| Normal | 0.82 | $ 98,000 | $ 80,360 | ||||
| Recession | 0.18 | $ 87,000 | $ 15,660 | ||||
| Firm value | $ 96,020 | ||||||
| Less value of debt | $ 90,000 | ||||||
| Shareholders value | $ 6,020 | ||||||
| Step-2:Calculation of firm value and shareholders value after considering project | |||||||
| State of economy | Probability of state of economy | Value | |||||
| a | b | a*b | |||||
| Normal | 0.82 | $ 1,05,000 | $ 86,100 | ||||
| Recession | 0.18 | $ 92,000 | $ 16,560 | ||||
| Firm value | $ 1,02,660 | ||||||
| Less value of debt | $ 90,000 | ||||||
| Shareholders value | $ 12,660 | ||||||
| Step-3:Calculation of effect of considering the project | |||||||
| After | Before | Effect | |||||
| Firm Value | $ 1,02,660 | $ 96,020 | $ 6,640 | Increased | |||
| Shareholders Value | $ 12,660 | $ 6,020 | $ 6,640 | Increased | |||
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