Question

.  Consider  a  project  with  free  cash  flows  in  one  year  of  $90,000  in  a  weak  economy  or

$117,000  in  a  strong  economy,  with  each  outcome  being  equally  likely.  The  initial  investment

required  for  the  project  is  $80,000,  and  the  project's  cost  of  capital  is  15%.  The  risk-free  interest

rate  is  5%.

Sisyphean  Bolder  Movers  Incorporated  has  no  debt,  a  total  equity  capitalization  of  $50  billion,

and  a  beta  of  2.0.  Included  in  Sisyphean's  assets  are  $12  billion  in  cash  and  risk-free  securities.

Required:  Calculate  Sisyphean's  enterprise  value  and  unlevered  beta  considering  the  fact  that

Sisyphean's  cash  is  risk-free.

Answer 1

NOTE: The first passage has no question and hence I have solved the first complete question which is the Sisyphean Bolder Movers Inc one.

For Sisyphean Bolder Movers Inc:

Assets		Owner's Equity and Liabilities
Cash	$ 12 billion	Equity	$ 50 billion
Risk-Free Securities	$ 38 billion	Debt	0
Total	$ 50 billion	Total	$ 50 billion

The enterprise value of a firm is the value of its operating assets. It is also the same as the intrinsic value calculated by discounting the firm's expected future free cash flows. Further, the value of the firm's operating assets can be determined by using the following relationship:

Value of Operating Assets + Value of Non-Operating Assets (Cash, Marketable Securities, etc) = Market Capitalization of Equity + Market Value of Debt

Value of Operating Assets = Equity Capitalization - Cash = 50 - 12 = $ 38 billion

Firm's Beta (Levered) = Bl = 2

Unlevered Beta = Bl / [1 + (1-tax rate) x Debt to Equity Ratio] = 2 / [1+ (1-tax rate) x 0] = 2 (the debt to equity ratio is zero as the firm i debt free. Hence the firm's levered beta is equal to the firm's unlevered beta. In other words, the beta of 2 entirely represents the firm's business risk and the firm has no financial risk owing to zero debt.