The cash flows of a firm next year will be either $250 or $1,750 in two...

The cash flows of a firm next year will be either $250 or $1,750 in two equally probable scenarios. The firm dissolves at the end of the year and discount rates are zero. The firm has debt with face value $500 and maturity one year (no coupon).

1. What is the value of the firm? What is the value for shareholders? What is the value of bondholders?

2.. Suppose that the firm decides to invest in a safer asset that transforms its payoffs to 500$ and 1, 500$. What is the change in the wealth of shareholders and bondholders?

3. Suppose that the firm decides to invest in a riskier asset that transforms its payoffs to 0$ and 2, 000$. What is the change in the wealth of shareholders and bondholders?

Lost with this, please explain how to come to answers!

Expert Solution

SEE THE IMAGE. ANY DOUBTS, FEEL FREE TO ASK. THUMBS UP PLEASE

jeff jeffy answered 1 year ago

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