ATC has a value of $98,000 in a normal economy and $87,000 in a recession.The firm has $90,000 of debt.The probability of a recession is 18 percent.The firm is considering a project that would change the firm values to $105,000 in a good economy and $92,000 in a recession.If the firm accepts this project,the firm value will ________ and shareholder value will ________.
A)decrease by $2,000;decrease by $1,000
B)increase by $2,000;increase by $2,000
C)increase by $6,640;increase by $6,100
D)increase by $12,000;increase by $12,000
E)increase by $6,640;increase by $6,640

Question

Quizplus · Accepted Answer

Current firm value = (1 - 0.18)($98,000)+ 0.18($87,000)= $96,020
Proposed firm value = (1 - 0.18)($105,000)+ 0.18($92,000)= $102,660
Change in firm value = $102,660 - $96,020 = $6,640
Current shareholder value = = (1 - 0.18)($98,000 - $90,000)+ 0.18($0)= $6,560
Proposed shareholder value = (1 - 0.18)($105,000 - $90,000)+ 0.18($92,000 - $90,000)= $12,660
Change in shareholder value = $12,660 - $6,560 = $6,100

ATC Has a Value of $98,000 in a Normal Economy