Company X is due to repay £100m of debt at the end of next year and its assets are currently worth £100m. The company has a project costing £100m now, which generates either £150m or £0 with equal probabilities in one year. Assume the company's cost of capital is 10%. Which of the following statements is the most accurate? The company's shareholders will never consider investing in the project since its expected NPV is negative The company's shareholders should invest in the project since its expected NPV is positive Undertaking the project reduces bankruptcy risks The shareholders of the company would benefit from undertaking the project because all the downside risk is borne by creditors
Company X is due to repay £100m of debt at the end of next year and its assets are currently worth £100m. The company has a project costing £100m now, which generates either £150m or £0 with equal probabilities in one year. Assume the company's cost of capital is 10%. Which of the following statements is the most accurate? The company's shareholders will never consider investing in the project since its expected NPV is negative The company's shareholders should invest in the project since its expected NPV is positive Undertaking the project reduces bankruptcy risks The shareholders of the company would benefit from undertaking the project because all the downside risk is borne by creditors
Financial And Managerial Accounting
15th Edition
ISBN:9781337902663
Author:WARREN, Carl S.
Publisher:WARREN, Carl S.
Chapter26: Capital Investment Analysis
Section: Chapter Questions
Problem 3CMA
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Company X is due to repay £100m of debt at the end of next year and its assets are currently worth £100m. The company has a project costing £100m now, which generates either £150m or £0 with equal probabilities in one year. Assume the company's cost of capital is 10%. Which of the following statements is the most accurate?
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The company's shareholders will never consider investing in the project since its expected NPV is negative |
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The company's shareholders should invest in the project since its expected NPV is positive |
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Undertaking the project reduces bankruptcy risks |
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The shareholders of the company would benefit from undertaking the project because all the downside risk is borne by creditors |
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