Q2: The All-Mine Corporation is deciding whether to invest in a new project. The project would have to be financed by equity, the cost is $2,100, and the return will be $2,600 in one year. The discount rate for both bonds and stock is 15 percent and the tax rate is zero. The predicted cash flows excluding this new project are $4,600 in a good economy, $3,100 in an average economy, and $1,100 in a poor economy. Each economic outcome is equally likely to occur and the promised debt repayment is $3,100. Should the company take the project? What is the value of the firm and its debt and equity components before and after the project addition? 2

Q2: The All-Mine Corporation is deciding whether to invest in a new project. The project would have to be financed by equity, the cost is $2,100, and the return will be $2,600 in one year. The discount rate for both bonds and stock is 15 percent and the tax rate is zero. The predicted cash flows excluding this new project are $4,600 in a good economy, $3,100 in an average economy, and $1,100 in a poor economy. Each economic outcome is equally likely to occur and the promised debt repayment is $3,100. Should the company take the project? What is the value of the firm and its debt and equity components before and after the project addition? 2

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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