Consider a project with free cash flow in one year of $137,759 or $191,222, with either outcome being equally likely. The initial Investment required for the project is $95,000, and the project's cost of capital is 18%. The risk-free interest rate is 8%. (Assume no taxes or distress costs.) The NPV is $ 44400. (Round to the nearest dollar.) 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? The initial market value of the unlevered equity is $ 139400. (Round to the nearest dollar.) c. Suppose the initial $95,000 is instead raised by borrowing at the risk-free interest rate. What are the cash flows of the levered equity, and what is its initial value according to M&M? The cash flows of the levered equity and the initial market value of the levered equity according to M&M is: (Round to the nearest dollar.) Debt Levered Equity Date 0 Initial Value Date 1 Cash Flow Strong Economy Cash Flow Weak Economy $95,000
Consider a project with free cash flow in one year of $137,759 or $191,222, with either outcome being equally likely. The initial Investment required for the project is $95,000, and the project's cost of capital is 18%. The risk-free interest rate is 8%. (Assume no taxes or distress costs.) The NPV is $ 44400. (Round to the nearest dollar.) 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? The initial market value of the unlevered equity is $ 139400. (Round to the nearest dollar.) c. Suppose the initial $95,000 is instead raised by borrowing at the risk-free interest rate. What are the cash flows of the levered equity, and what is its initial value according to M&M? The cash flows of the levered equity and the initial market value of the levered equity according to M&M is: (Round to the nearest dollar.) Debt Levered Equity Date 0 Initial Value Date 1 Cash Flow Strong Economy Cash Flow Weak Economy $95,000
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
Related questions
Question
am. 123.
Transcribed Image Text:Consider a project with free cash flow in one year of $137,759 or $191,222, with either outcome being equally likely. The initial
Investment required for the project is $95,000, and the project's cost of capital is 18%. The risk-free interest rate is 8%. (Assume no
taxes or distress costs.)
The NPV is $ 44400. (Round to the nearest dollar.)
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?
The initial market value of the unlevered equity is $ 139400. (Round to the nearest dollar.)
c. Suppose the initial $95,000 is instead raised by borrowing at the risk-free interest rate. What are the cash flows of the levered equity,
and what is its initial value according to M&M?
The cash flows of the levered equity and the initial market value of the levered equity according to M&M is: (Round to the
nearest dollar.)
Debt
Levered Equity
Date 0
Initial Value
Date 1
Cash Flow Strong Economy
Cash Flow Weak Economy
$95,000
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