Long description
Investment in Firm B |
|
Value of Firm B's equity |
$30.00 million |
Amount invested |
7.50 million |
Price of 10% of Firm B's shares |
3.00 million |
Amount invested in risk-free debt |
4.50 million |
State of the Economy ($ millions) |
Cash Flow |
Firm A Equity |
Firm B Debt + Equity = |
Total |
Recession |
$50 |
$5 |
$4.725 $0.8 |
$5.53 |
Normal |
100 |
$10 |
$4.725 $5.8 |
$10.53 |
Boom |
150 |
$15 |
$4.725 $0.8 |
$15.53 |
The text, Cash flows from investing in Firm B are greater than from investing in Firm A because Firm B’s equity is underpriced points to the Total column.
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