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**

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...

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capital is 10%. The risk-free interest rate is 12%. (Assume no
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b. Suppose that to raise the funds for the initial investment, the
project...

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outcome being equally likely. The initial investment required for
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The risk-free interest rate is 5%.
Suppose that you borrow only $40,000 at risk free rate and
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(Please...

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outcome being equally likely. The initial investment required for
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The risk-free interest rate is 5%.
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The answer is 16.11%, but I am not sure how my prof got that
answer.

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