Question: A firm is worth $85 or $215 with equal probability and is financed with debt that has a face value of $100. It is considering

A firm is worth $85 or $215 with equal probability and is financed with debt that has a face value of $100. It is considering a new project that is equally likely to be worth -$50 or +$55. The cost of capital is 11% for all securities. What will happen to the value of the firm if the new project is undertaken?

The value of the firm will increase by $2.25

The value of the firm will decrease by $3

The value of the firm will decrease by $2.25

The value of the firm will increase by $3

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