6. The cost of project X is $100, and it would generate $120 in one...
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6. The cost of project X is $100, and it would generate $120 in one year without risk. If a firm does not invest in project X, then the firm value in one year would be at $500 in a boom and
$100 if it is at recession. The chance of a boom is 50%, and the chance of recession is 50%. The firm has a one-year debt, which would be matured in one year at $300. If project X is accepted, the cost is required to be financed by additional equity since the firm does not have cash recently. Assume the financial manager would maximize the shareholders wealth. If the appropriate discount rate is 10%, would the manager accept the project, and would there be any under-investment problem? Explain it with calculation.
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