A firm has debt due next year and the amount is 100. It has cash of...

A firm has debt due next year and the amount is 100. It has cash of 10. It has only 1 project to invest. If the project succeeds, it will generate 1000 cash flow next year and 0, otherwise. Probability of success is 5%. Initial cost of project is 10. If the firm does not invest in the project, it will put 10 cash into risk-free asset. Risk-free return is 2%. Discount rate for the project cash flow is 10%.

Suppose manager maximizes equity holder value. Would he invest in this project? (4pt)

What is PV of debt if manager decides to invest in the project? What is PV of debt if manager decides NOT to invest in the project but put 10 cash into risk-free asset? (3pt)

Would debtholders like the firm to invest in the project? (3pt)

What is the minimum success probability above which debtholders like the firm to invest in the project? (3pt)

Expert Solution

ekkarill92 answered 2 years ago

The cash flows of a firm next year will be $100, $200 and $300 in (equally...

The cash flows of a firm next year will be $100, $200 and $300 in (equally probable) bad, normal and good states, respectively. The firm dissolves at the end of the year and discount rates are zero. Shareholders decide to issue bonds with face value $100 and distribute the proceeds as dividends. Shareholders decide to issue additional debt, according to the existing covenants, with face value $100 and pocket the proceeds as dividends. 1. What is the change in shareholder...

A firm has $100 in cash and debt of $80. Assume that the time value of...

A firm has $100 in cash and debt of $80. Assume that the time value of money is zero. A novel project comes along that costs $60 and that will either deliver $0 or x with equal probabilities 1. What is the value of debt and equity without the project? 2. What is the x value above which the project would be positive NPV? Call this xh 3. What is the x value above which the shareholders want the firm...

Q 19.36. (Advanced) A firm has $100 in cash and debt of $80. Assume that the...

Q 19.36. (Advanced) A firm has $100 in cash and debt of $80. Assume that the time value of money is zero. A novel project comes along that costs $60 and that will either deliver $0 or x with equal probabilities. xh is the value at which this project would have a positive NPV. xl is the value above which share holders would want the firm to accept the project. Divide the possible regions into those below xl, those between...

If a firm increases the amount of debt that it has this could lead to an...

If a firm increases the amount of debt that it has this could lead to an increase in ______. financial risk the cost of equity both the cost of equity and the financial risk none of the above

Cruz Corporation has $100 billion of debt outstanding. An otherwise identical firm has no debt and...

Cruz Corporation has $100 billion of debt outstanding. An otherwise identical firm has no debt and has a market value of $450 billion. Under the Miller model, what is Cruz’s value if the federal-plus-state corporate tax rate is 28%, the effective personal tax rate on stock is 17%, and the personal tax rate on debt is 29%? Enter your answer in billions. For example, an answer of $1.23 billion should be entered as 1.23, not 1,230,000,000. Round your answer to...

Consider a firm as follows: Assume that the firm has no debt. The cash flows are...

Consider a firm as follows: Assume that the firm has no debt. The cash flows are received at the end of each year and are perpetual. Cost of equity capital for an unlevered firm, r0, is 20%. The first cash-flow will be received one year from today. All calculations for valuation are done today. Firm value is defined as collective value of debt and equity. Sales = $ 500,000 Cash Costs = 360,000 Operating Income = 140,000 Tax @ 34%...

A firm is expected to have free cash flow of $881 million next year. The firm...

A firm is expected to have free cash flow of $881 million next year. The firm has $1 billion of outstanding debt and no preferred stock. The WACC is 7% and FCF is expected to grow at 1% indefinitely. If the firm has 91 million shares outstanding, what is the expected value of the firm's stock price? If a portfolio holds three stocks in equal amounts, and the betas of the three stocks are 0.8, 1.4, and 1.4, what is...

A firm is expected to have free cash flow of $782 million next year. The firm...

A firm is expected to have free cash flow of $782 million next year. The firm has $1 billion of outstanding debt and no preferred stock. The WACC is 10% and FCF is expected to grow at 1% indefinitely. If the firm has 104 million shares outstanding, what is the expected value of the firm's stock price?

The cash flows of a firm next year will be either $250 or $1,750 in two...

The cash flows of a firm next year will be either $250 or $1,750 in two equally probable scenarios. The firm dissolves at the end of the year and discount rates are zero. The firm has debt with face value $500 and maturity one year (no coupon). 1. What is the value of the firm? What is the value for shareholders? What is the value of bondholders? 2.. Suppose that the firm decides to invest in a safer asset that...

Sheridan Chiropractic Clinic produces $200,000 of cash flow each year. The firm has no debt outstanding,...

Sheridan Chiropractic Clinic produces $200,000 of cash flow each year. The firm has no debt outstanding, and its cost of equity capital is 20 percent. The firm’s management would like to repurchase $680,000 of its equity by borrowing $680,000 at a rate of 10 percent per year. If we assume that the debt will be perpetual, find the cost of equity capital for Sheridan after it changes its capital structure. Assume that Modigliani and Miller Proposition 1 assumptions hold. (Round...

Question