Sigma Design, a computer interface start-up firm

with no tangible assets, has invested $50,000 in

R&D. The success of the R&D effort as well as

the state of the economy will be observed in one

year. If the R&D is successful ( prob. 90%),

Sigma requires a $53,000 investment to start

manufacturing. If the economy is favorable

( prob. 90%), the project is worth $153,000, and

if it is unfavorable, the project will have a value of

$61,000. Demonstrate how the value of Sigma is

affected by whether or not it was originally

financed with debt or equity. Assume no taxes, no

direct bankruptcy costs, all investors are risk

neutral, and the risk-free interest rate is zero.

This question is financial markets and corporate strategy 2E exercise16.5