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?

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jeff jeffy answered 1 year ago

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