ATC has a value of $70,000 in a good economy and $55,000 in a recession. The firm has $60,000 of debt. The probability of a recession is 50 percent. The firm is considering a project that would change the firm values to $73,000 in a good economy and $50,000 in a recession. If the firm accepts this project, the firm value will ______ and shareholder value will ______.
decrease by $1,000; increase by $1,500
increase by $1,500; increase by $1,500
decrease by $2,000; decrease by $2,000
decrease by $1,000; decrease by $1,000
increase by $1,500; decrease by $1,000
decrease by $1,000; increase by $1,500
Working notes for the above answer is as under
We have been given that,
the firm has $60,000 of debt.
The probability of a recession is 50 percent.
The firm is considering a project that would change the firm values to $73,000 in a good economy and $50,000 in a recession.
So value vill be
| 73000 | 50% | 36500 |
| 50000 | 50% | 25000 |
| 61500 |
Increase in value of shareholder value will
=61500-60000
=$1500
now decrease in firm value will
=
| 73000-70000 | 3000 | 50% | 1500 |
| 55000-50000 | -5000 | 50% | -2500 |
| -1000 |
