Question

Consider a project with free cash flow in one year of $146,076 or $198,619​, with either outcome being equally likely. The initial investment required for the project is $75,000​, and the​ project's cost of capital is 21%. The​ risk-free interest rate is 6%. (Assume no taxes or distress​ costs.)

a. What is the NPV of this​ project?

b. Suppose that to raise the funds for the initial​ investment, the project is sold to investors as an​ all-equity firm. The equity holders will receive the cash flows of the project in one year. How much money can be raised in this way-that ​is, what is the initial market value of the unlevered​ equity?  

c. Suppose the initial $75,000 is instead raised by borrowing at the​ risk-free interest rate. What are the cash flows of the levered​ equity, and what is its initial value according to​ M&M?

a. What is the NPV of this​ project?

The NPV is ​$______ (Round to the nearest​ dollar.)

b. Suppose that to raise the funds for the initial​ investment, the project is sold to investors as an​ all-equity firm. The equity holders will receive the cash flows of the project in one year. How much money can be raised in this way-that ​is, what is the initial market value of the unlevered​ equity?  

The initial market value of the unlevered equity is ​$_____ (Round to the nearest​ dollar.)

C) Suppose the initial $75,000 is instead raised by borrowing at the​ risk-free interest rate. What are the cash flows of the levered​ equity, and what is its initial value according to​ M&M?

The cash flows of the levered equity and the initial market value of the levered equity according to​ M&M is:​(Round to the nearest​ dollar.)

                          Date 0                                                                           Date 1

                Initial Value                   Cash Flow Strong Economy                   Cash Flow Weak Economy

Debt           $75,000

Levered Equity

Answer 1

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