Question

A risk-free project requires an upfront cost of $1 million and generates annual cash flow of...

A risk-free project requires an upfront cost of $1 million and generates annual cash flow of $90,000 in perpetuity. Interest rates will either be 10% or 5% in one year and remain there forever with 90% chance of dropping to 5%. The one-year risk-free rate interest rate is 8% and today’s rate on a risk-free perpetual bond is 5.4%. The rate on an equivalent perpetual bond that is repayable at any time is 9%. Should you invest in this project today, or wait and see if rates drop and then invest? Clearly prove and state why.

Business   Economics   
0 0
Add a commentTranscribed image text
Next >

Homework Answers

Answer #1

0 0
Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Log In

Sign Up

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
A 5-year project requires an initial investment of $28 million.  It generates an annual cash flow of...
A 5-year project requires an initial investment of $28 million.  It generates an annual cash flow of $9 million. The unlevered cost of equity is 20%.  A loan of $22.5 million at a rate of 10%.  Principal will be repaid in a lump sum when project ends.  However, the lender will extend the loan for only three years.  The firm’s tax rate is 30%.  Calculate the project’s adjusted present value.  
A project has an expected risky cash flow of $300, in year t= 3. The risk-free...
A project has an expected risky cash flow of $300, in year t= 3. The risk-free rate is 5percent, the market risk premium is 8percent and the project's beta is 1.25. Calculate the certainty equivalent cash flow for year t=3.
1. Consider a project with free cash flows in one year of $132,824 in a weak...
1. Consider a project with free cash flows in one year of $132,824 in a weak market or $171,945 in a strong​ market, with each outcome being equally likely. The initial investment required for the project is $90,000​, and the​ project's unlevered cost of capital is 10%. The​ risk-free interest rate is 12%. (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...
Tomkat Corp. has only a single asset. This asset generates operating cash flow of $200,000 per...
Tomkat Corp. has only a single asset. This asset generates operating cash flow of $200,000 per year, in perpetuity. Tomkat also has a single liability, which is a perpetual bond (the maturity date is infinitely far in the future) that has a face value of $1 million and that pays coupon interest at a rate of 8% once per year. The appropriate discount rate for all cash flows in this problem is 10% per year. (a) What is the value...
Consider a project with free cash flows in one year of $90,000 in a weak economy...
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%. Suppose that you borrow only $40,000 at risk free rate and issues new equity to cover the remainder the firm's equity cost of capital will be closest to? (Please...
Consider a project with free cash flows in one year of $90,000 in a weak economy...
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 12%. The risk-free interest rate is 3%. Suppose that you borrow only $50,000 in financing the project. According to MM, the firm's equity cost of capital will be closest to:
Consider a project with free cash flows in one year is $90,000 in a weak economy...
Consider a project with free cash flows in one year is $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%.   Suppose that you borrow $60,000 in financing the project. According to the MM proposition II, the firm's equity cost of capital will be closest to: a. 45% b. 30%...
Consider a project with free cash flow in one year of $140,738 or $162,796​, with either...
Consider a project with free cash flow in one year of $140,738 or $162,796​, with either outcome being equally likely. The initial investment required for the project is $80,000​, and the​ project's cost of capital is 18%. The​ risk-free interest rate is 11%. ​(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...
Consider a project with free cash flows in one year of $90,000 in a weak economy...
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%. Suppose that you borrow only $45,000 in financing the project. According to MM proposition II, what is the firm's equity cost of capital? (PLEASE provide formulas, Step-by-step process for...
Question 1 Explain the meaning of Unsystematic risk clearly. Question 2 Given a quarterly payment of...
Question 1 Explain the meaning of Unsystematic risk clearly. Question 2 Given a quarterly payment of $2,000 for the next 11 years, and an annual interest rate of 8%, calculate the future value. Question 3 Bond P is a premium bond with a 7.2% coupon rate. The bond makes half-annual payments, have a YTM of 5.1% and have five years to maturity. What is the current yield for bond P? If interest rates remain unchanged, what is the expected capital...
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT