Question: Your firm s R D department has been working on a new
Your firm’s R&D department has been working on a new process that, if it works, can produce oil from coal at a cost of $25 per barrel; the current market price for oil is $60 per barrel. The company needs $10 million of external funds at this time to complete the research. The results of this work will be known in about one year, and it has a 50–50 chance of success. If the research is successful, your company will need to raise a substantial amount of new money to put the idea into production. Your economists forecast that although the economy will be depressed next year, interest rates will be high because of international monetary problems. You must recommend how the currently needed $10 million should be raised—as debt or as equity. How would the potential implications of your project influence your decision?
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