The Window Store will have a value of 139000 if the economy

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?

Solution

Value of the firm:

= $139,000×68%+$121,000×32%

= $94,520+$38,720

= $133,240

Hence, value of the firm is $133,240.