Snowshoes is launching a new revolutionary type of shoes. Depending on the snowfalls this winter, the company will have a value of either 80 million, 105 million or 130 million at the end of the year with equal probabilities. The firm has a beta of 0, the cost of capital is the risk free rate: 5%. We are in perfect capital markets, except that in case the firm default, 20% of the value of the firm is destroyed. What is the value of Showshoes without leverage?

Answer rating: 100% (QA)

Lets denote the probabilities of each potential value as follows PV1 PV2 PV3 13 Now lets calcula... View the full answer