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A project requires an investment of $20,000 and will return $26,500 after one year. Suppose the...

A project requires an investment of $20,000 and will return $26,500 after one year. Suppose the 10-year Treasury bill rate is 5%, and the project has a risk premium of 12%.

A) Should this project be taken? Also Calculate the IRR of this project.

B)If the manager wants to finance the project solely with equity, what is the equity holder’s valuation of this project?

C)If the manager wants to finance the project 50% with equity and 50% with 10-year T-bill, what is equity holder’s valuation of this project?

D)Explain in your own words why the equity holder’s valuation of the project differs between B) and C).

E)Using the information of this project, draw a graph illustrating the relation between cost of levered equity and the leverage ratio [D/ (D+E)]

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jeff jeffy answered 1 year ago
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