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QUESTION

ABC Corp. is considering an investment project over the next period. It has an equal chance of success and failure.

ABC Corp. is considering an investment project over the next period. It has an equal chance of success and failure. If it succeeds, the firm's assets will have a market value of $40 million, and if it fails, the market value will drop to $10 million. The current market value of the firm's asset is $25 million. Also, the firm currently has bonds outstanding with $15 million of promised payment to bondholders at their maturity, which is the end of the period. What is the firm's equity value? Assume that the risk-free rate over the next period is 10%. (Hint: Use the binomial approach)

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