Answer Happy

Parkville, Inc. will introduce a new product to the market. Depending on how the product will do in the market, Parkville estimates that the firm will have a value of either $180 million, $230 million, or $310 million next year, with equal probability for each of the three outcomes. Assume that the cash flows are unrelated to the state of the economy (i.e. risk from the project is diversifiable) so that the project has a beta of O and a cost of capital equal to the risk-free rate, which is currently 4%. Assume perfect capital markets. Suppose that if Parkville defaults, the value of firm's assets will go down by 20% due to bankruptcy costs and assume that Parkville has zero-coupon debt with a $200 million face value that is due next year. The total value of Parkville today with leverage is closest to: $75 million $154 million $180 million $219 million None of the above