Assume that the project Fountain chooses will be the firms only activity and that the firm will close one year from today

s economists estimate that a good business environment and a bad business envir Show more Fountain Corporations economists estimate that a good business environment and a bad business environment are equally likely for the coming year. The managers of Fountain must choose between two mutually exclusive projects. Assume that the project Fountain chooses will be the firms only activity and that the firm will close one year from today. Fountain is obligated to make a $5400 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 Project Payoff High Volatility Project Payoff Bad .5 $ 5400 $ 4800 Good .5 $ 6550 $ 7150 What is the expected value of the firm if the low-volatility and high-volatility project is undertaken? What is the expected value of the firms equity if the low-volatility and high-volatility project is undertaken? Show less

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