Assume no taxes-no direct bankruptcy costs

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Sigma Design, a computer interface start-up firm with no tangible assets, has invested $50,000 in R&D. The success of the R&D effort as well as the state of the economy will be observed in one year. If the R&D is successful ( prob. 90%), Sigma requires a $53,000 investment to start manufacturing. If the economy is favorable ( prob. 90%), the project is worth $153,000, and if it is unfavorable, the project will have a value of $61,000. Demonstrate how the value of Sigma is affected by whether or not it was originally financed with debt or equity. Assume no taxes, no direct bankruptcy costs, all investors are risk neutral, and the risk-free interest rate is zero.

Reference no: EM131914332

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