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Thompson Industries is considering undertaking a new project
with a one-year life with the following 1 answer below » Thompson Industries is considering undertaking a new project
with a one-year life with the following expected return
scenarios. Scenario 1 HIGH-RISK PROJECT Scenario 2 LOW-RISK PROJECT Cash flow (boom) $1,500,000 $1,000,000 Cash flow (bust) $400,000 $500,000 The company currently has no debt, but is considering borrowing
$870,000 on a short-term basis to help finance its purchase of the
project. The company will owe $900,000, including principal and
interest, in one year. There is 60% chance a boom will occur, and
only 40% chance a bust will occur. Part 2: Case Analysis 1)& View complete question » Thompson Industries is considering undertaking a new project
with a one-year life with the following expected return
scenarios. Scenario 1 HIGH-RISK PROJECT Scenario 2 LOW-RISK PROJECT Cash flow (boom) $1,500,000 $1,000,000 Cash flow (bust) $400,000 $500,000 The company currently has no debt, but is considering borrowing
$870,000 on a short-term basis to help finance its purchase of the
project. The company will owe $900,000, including principal and
interest, in one year. There is 60% chance a boom will occur, and
only 40% chance a bust will occur. Part 2: Case Analysis 1) Calculate the expected value of the high- and
low-risk projects to Thompson IndustryA????1s stockholders if the
company remains unlevered. Which project would the stockholders
prefer? 2) Calculate the expected value of the high- and
low-risk projects to Thompson’s stockholders and bondholders,
assuming the company does borrow money to partially finance the
purchase of the project. Which project would the bondholders
prefer? Which project would the stockholders prefer? 3) Explain why a conflict exists between the bondholders
and the stockholders. View less » Aug 05 2015 11:04 AM
