The All-Mine Corporation Is Deciding Whether to Invest in a New

Essay

The All-Mine Corporation is deciding whether to invest in a new one-year project.The project would have to be financed by equity,the cost is $2,000,and the return will be a guaranteed $2,500 in one year.The discount rate for both bonds and stock is 15 percent and the tax rate is zero.The predicted cash flows excluding this new project are $4,500 in a good economy,$3,000 in an average economy,and $1,000 in a poor economy.Each economic outcome is equally likely to occur and the promised debt repayment is $3,000.Should the company take the project? What is the value of the firm and its debt and equity components before and after the project addition?