Dairy Isle has a value of $41,000 in a good economy and $32,000 in a recession. The firm has $35,000 of debt. The probability of a recession is 50 percent. The firm is considering a project that would change the firm values to $43,000 in a good economy and $29,000 in a recession. Will shareholders be willing to accept this project? Why or why not?
No; Because the project will lower shareholder value by $500
No; Because the project will lower firm value by $500
Yes; Because shareholder value will increase $1,000 at a cost of $1,500 to the bondholders
No; Because the firm will be worth less in a recession than it is currently
Yes; Because the project will increase both firm and shareholder value by $1,000.