Louisiana State University, Shreveport FIN FIN 720 The firm has a debt obligation of 198 due at t=1. The current asset value is 193; that is, the firm is under financial distress. The management…
value is 193; that is, the firm is under financial distress. The management believes that the asset value is most likely to remain at 193 at t=1 and the firm would go under. The firm has an investment project at the present time that requires 19 as initial investment. The value of the project has a 45% chance to become 29 (that is, a gain of 10) and a 55% chance to become 7 (that is, a loss of 12). The WACC for the project is 30 percent. If the firm invest in the project, what is the expected cash flow at t=1 for shareholders?
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