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16 June, 22:40

The Window Store will have a value of $139,000 if the economy does well this coming year and a value of $121,000 if the economy does poorly. The probability of a good economy is 68 percent. The firm owes its bondholders $63,000. The firm will only operate for one more year. What is the value of this firm to its shareholders?

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  1. 17 June, 02:11
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    The value of this firm to shareholders is $70240

    Explanation:

    Using expected value approach, the value of the firm can be computed as:

    (Optimistic value*its probability) + (pessimistic value*its probability)

    optimistic value=$139000 and its probability is 68%=0.68

    Pessimistic value=$121000 and its probability is 1-0.68=0.32

    Expected value = ($139000*0.68) + ($121000*0.32)

    =$133240

    However, the value to shareholders is the expected value of the firm less debt of $63000

    Equity value=$133240-$63000

    =$70240
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Home » Business » The Window Store will have a value of $139,000 if the economy does well this coming year and a value of $121,000 if the economy does poorly. The probability of a good economy is 68 percent. The firm owes its bondholders $63,000.
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