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Consider a project with free cash flow in one year of $140,702 or $160.360, with either outcome being equally likely. The intal investment required for the project is $80.000, and the project's cost of capital is 17% The risk-free interest rate is 5% (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 holders will receive the cash flows of the project in one year How much money can be raised i this way that is what is the initial market value of the unlevered equity? c. Suppose the initial $80,000 is instead raised by borowing 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?

Consider a project with free cash flow in one year of $140,702 or $160.360, with either outcome being equally likely. The intal investment required for the project is $80.000, and the project's cost of capital is 17% The risk-free interest rate is 5% (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 holders will receive the cash flows of the project in one year How much money can be raised i this way that is what is the initial market value of the unlevered equity? c. Suppose the initial $80,000 is instead raised by borowing 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?

Essentials Of Investments
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
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K- Consider a project with free cash flow in one year of $140,702 or $180,360, with either outcome being equally likely. The initial investment required for the project is $80,000, and the project's cost of capital is 17%. The risk-free interest rate is 5% (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 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 $80,000 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? a. What is the NPV of this project? The NPV is $ 57200 (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 $ 137206. (Round to the nearest dollar) c. Suppose the initial $60,000 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) Date 1 Cash Flow Strong Debt Levered Equity Date 0 Initial Value $80,000 omy Cash Weak Economy
Transcribed Image Text:K- Consider a project with free cash flow in one year of $140,702 or $180,360, with either outcome being equally likely. The initial investment required for the project is $80,000, and the project's cost of capital is 17%. The risk-free interest rate is 5% (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 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 $80,000 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? a. What is the NPV of this project? The NPV is $ 57200 (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 $ 137206. (Round to the nearest dollar) c. Suppose the initial $60,000 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) Date 1 Cash Flow Strong Debt Levered Equity Date 0 Initial Value $80,000 omy Cash Weak Economy
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