Question

Consider a project with free cash flows in one year of ​$141,442 or ​$179,644​, with each outcome being equally likely. The initial investment required for the project is ​$98,006​, and the​ project's cost of capital is 17 %. The​ risk-free interest rate is 12 %.

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 holders will receive the cash flows of the project in one year. How much money can be raised in this way that ​is, what is the initial market value of the unlevered​ equity?  

c. Suppose the initial $98,006 is instead raised by borrowing at the​ risk-free interest rate. What are the cash flows of the levered​ equity, what is its initial value and what is the initial equity according to​ MM?

                     Initial Value                 Cash Flow Strong Economy                      Cash Flow Weak Economy

Debt                 98006                                        ?                                                                  ?

Levered Equity     ?                                            ?                                                                  ?

(Need to know the question marks)

Answer 1

ALL FIGURES ARE ROUNDED. WANT TO HAVE TILL 2 DECIMALS, LET ME KNOW. WILL DO THAT