You've identified a project that would require an initial investment this year of $1500, and would...

You've identified a project that would require an initial investment this year of $1500, and would generate cash flows of either $2400 or $1200 depending on the economy, with either being equally likely. We're going to use our 'perfect world' approach and assume no taxes and no transaction costs. You demand an 8% market risk premium and the risk-free rate is 4%. What is the value of this project today and the expected return to equity holders? (company has no debt) You are considering borrowing $300 to help finance the project, and can borrow 6%. In this case, what should the price be for the equity portion of the company and what is the expected return to equity holders? You are interested in boosting your risk to earn a higher return, and you are considering borrowing $1200. In this case, what should the price be for the equity portion of the company and what is the expected return to equity holders?

Solutions

Expert Solution

Solution:

Formula View:

Note: "If you have any Query/Suggestions, feel free to ask me in the comment box."

jeff jeffy answered 9 months ago

Next > < Previous

Related Solutions

What is the NPV of project A? The project would require an initial investment in equipment...

What is the NPV of project A? The project would require an initial investment in equipment of 60,000 dollars and would last for either 3 years or 4 years (the date when the project ends will not be known until it happens and that will be when the equipment stops working in either 3 years from today or 4 years from today). Annual operating cash flows of 18,600 dollars per year are expected each year until the project ends in...

Cooper Industries is considering a project that would require an initial investment of $101,000. The project...

Cooper Industries is considering a project that would require an initial investment of $101,000. The project would result in cost savings of $62,000 in year 1 and $70,000 in year two. What is the internal rate of return?

The manager of Keebee, Inc. is considering a new project that would require an initial investment...

The manager of Keebee, Inc. is considering a new project that would require an initial investment of $1,197,810. The cost of capital or the required rate of return of this company is 10 percent. This project will generate an annual cash inflow of $300,000 in the following five years. Calculate the net present value (NPV) of this project. Indicate whether or not this project is acceptable. Calculate the internal rate of return (IRR) of this project.

Fairfax Pizza is evaluating a project that would require an initial investment in equipment of 200,000...

Fairfax Pizza is evaluating a project that would require an initial investment in equipment of 200,000 dollars and that is expected to last for 6 years. MACRS depreciation would be used where the depreciation rates in years 1, 2, 3, and 4 are 40 percent, 33 percent, 19 percent, and 8 percent, respectively. For each year of the project, Fairfax Pizza expects relevant, incremental annual revenue associated with the project to be 346,000 dollars and relevant, incremental annual costs associated...

A research project would require initial investment of 100,000. There are three possible outcomes for this...

A research project would require initial investment of 100,000. There are three possible outcomes for this project: a.) 30% probability that investment yields annual income of 35,000 for six year (starting from year 1 to year six) and zero salvage value b.) 50% probability that investment yields annual income of 25,000 for six year (starting from year 1 to year six) and zero salvage value c.) 20% probability of failure that yields zero annual income but salvage value of 75,000...

Kansas Co. wants to invest in a project in China. It would require an initial investment...

Kansas Co. wants to invest in a project in China. It would require an initial investment of 5,000,000 yuan. It is expected to generate cash flows of 7,000,000 yuan at the end of one year. The spot rate of the yuan is $.12, and Kansas thinks this exchange rate is the best forecast of the future. However, there are 2 forms of country risk. First, there is a 50% chance that the Chinese government will require that the yuan cash...

1) Fairfax Pizza is evaluating a project that would require an initial investment in equipment of...

1) Fairfax Pizza is evaluating a project that would require an initial investment in equipment of 300,000 dollars and that is expected to last for 6 years. MACRS depreciation would be used where the depreciation rates in years 1, 2, 3, and 4 are 40 percent, 34 percent, 18 percent, and 8 percent, respectively. For each year of the project, Fairfax Pizza expects relevant, incremental annual revenue associated with the project to be 567,000 dollars and relevant, incremental annual costs...

Middlefield Motors is evaluating project Z. The project would require an initial investment of 72,500 dollars...

Middlefield Motors is evaluating project Z. The project would require an initial investment of 72,500 dollars that would be depreciated to 13,000 dollars over 5 years using straight-line depreciation. The first annual operating cash flow of 27,500 dollars is expected in 1 year, and annual operating cash flows of 27,500 dollars are expected each year forever. Middlefield Motors expects the project to have an after-tax terminal value of 353,500 dollars in 5 years. The tax rate is 20 percent. What...

Herman Co. is considering a four-year project that will require an initial investment of $15,000.

Herman Co. is considering a four-year project that will require an initial investment of $15,000. The base-case cash flows for this project are projected to be $12,000 per year. The best-case cash flows are projected to be $20,000 per year, and the worst-case cash flows are projected to be –$1,000 per year. The company’s analysts have estimated that there is a 50% probability that the project will generate the base-case cash flows. The analysts also think that there is a...

Albert Co. is considering a four-year project that will require an initial investment of $7,000. The...

Albert Co. is considering a four-year project that will require an initial investment of $7,000. The base-case cash flows for this project are projected to be $15,000 per year. The best-case cash flows are projected to be $22,000 per year, and the worst-case cash flows are projected to be –$1,500 per year. The company’s analysts have estimated that there is a 50% probability that the project will generate the base-case cash flows. The analysts also think that there is a...

Subjects