Calculate the value of All-Mine debt and equity components

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Question - The All-Mine Corporation is deciding whether to invest in a new project that lasts for one year only. The project would have to be financed by equity, the cost is $2,000, and the return will be $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.

Required -

(a) Calculate the value of All-Mine's debt and equity components before and after the project addition.

(b) Will the company take the project? Why? Show all necessary calculations.

Reference no: EM132928706

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