Business, 25.04.2020 00:38 neash19

Economists at The Wells Corporation estimate that a good business environment and a bad business environment are equally likely for the coming year. The managers of Wells must choose between two mutually exclusive projects. Assume that the project Wells chooses will be the firm’s only activity and that the firm will close one year from today. Wells is obligated to make a $4,500 payment to bondholders at the end of the year. The projects have the same systematic risk, but different volatilities. Consider the following information pertaining to the two projects: Economy Probability Low Volatility Payoff High Volatility Payoff Bad 0.5 4290 3892 Good 0.5 5471 5962 What is the expected value of the firm if the low volatility project is undertaken? (Round answer to 0 decimal places. Do not round intermediate calculations) What is the expected value of the firm if the high volatility project is undertaken? (Round answer to 0 decimal places. Do not round intermediate calculations) What is the expected value of the firm’s equity if the low volatility project is undertaken? (Round answer to 0 decimal places. Do not round intermediate calculations) What is the expected value of the firm’s equity if the high volatility project is undertaken? (Round answer to 0 decimal places. Do not round intermediate calculations)

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