Question

A firm is considering two mutually exclusive projects (named A and B). The cash flows in each of two states of the worlds are provided for each of the projects. The projects cost the same.

	Project A		Project B
	Boom	Recession	Boom	Recession
Probability	0.6	0.4	0.6	0.4
Cash flow	$200	$100	$220	$60
Payment to debt holders	$100	$100	$100	$50
Distribution to stockholders	$100	$0	$120	$10

3) The value of Project A is _____ and of Project B is _____. Therefore, the payoff to stockholders is _____ for Project A and _____ for Project B.

A) 150, 140, 50, 65

B) 156, 140, 60, 65

C) 160, 156, 60, 76

D) 160, 156, 76, 60

E) None of the above

Answer 1

		Cashflows of Project		Expected Cash flow
	Probability	Project A	Project B	ProjectA	ProjectB
Boom	0.6	200	220	120	132
Recession	0.4	100	60	40	24
Value of project				160	156
		Cashflowws to Stockholder		Expected Cash flow
	Probability	Project A	Project B	ProjectA	ProjectB
Boom	0.6	100	120	60	72
Recession	0.4	0	10	0	4
Cashflows to Stockholders				60	76
Answer is C. 160;156 ; 60;76