3. A small firm earns $1000/year, has 10% cost of debt. The firm has $6,000 in...

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3. A small firm earns $1000/year, has 10% cost of debt. The firm has $6,000 in equity and $4,000 in debt. The tiny firm is worth $10,000. The firm is considering a project with a 50% chance of succeeding and earning $10,000 and a 50% chance of failing and losing $20,000 (and going bankrupt). What is the possible gain, possible loss, and expected return for both the equity and debt holders? Would the shareholders vote to take on this project? Would the shareholders vote to take on this project if it had a 75% chance of succeeding and a 25% chance of failing? 3. A small firm earns $1000/year, has 10% cost of debt. The firm has $6,000 in equity and $4,000 in debt. The tiny firm is worth $10,000. The firm is considering a project with a 50% chance of succeeding and earning $10,000 and a 50% chance of failing and losing $20,000 (and going bankrupt). What is the possible gain, possible loss, and expected return for both the equity and debt holders? Would the shareholders vote to take on this project? Would the shareholders vote to take on this project if it had a 75% chance of succeeding and a 25% chance of failing?

Answer rating: 100% (QA)

Expected return for Equity Holders The possible gain for equity holders is the difference between th... View the full answer