Burger Queen has a value of $38,000 in a good economy and $24,000 in a recession.The firm has $25,000 of debt.The probability of a recession is 50 percent.The firm is considering a project that would change the firm values to $42,000 in a good economy and $22,000 in a recession.Will shareholders accept this project? Will bondholders like this project?
A)Both shareholders and bondholders will like this project.
B)Neither shareholders nor bondholders will like this project.
C)Shareholders,but not bondholders,will like this project.
D)Bondholders,but not shareholders,will like this project.
E)Shareholders will like this project but bondholders will be indifferent.

Question

Quizplus · Accepted Answer

Current shareholder value = 0.5($38,000 - $25,000)+ 0.5($0)= $6,500
Proposed shareholder value = 0.5($42,000 - $25,000)+ 0.5($0)= $8,500
Change in shareholder value = $8,500 - $6,500 = $2,000
Current bondholder value = 0.5($25,000)+ 0.5($24,000)= $24,500
Proposed bondholder value = 0.5($25,000)+ 0.5($22,000)= $23,500
Change in bondholder value = $23,500 - $24,500 = -$1,000
Shareholders will accept this project but bondholders will not like it.

Burger Queen Has a Value of $38,000 in a Good