Consider a project with free cash flows in one year of $90,000 in a weak economy or $117,000 in astrong economy, with each outcome being equally likely. The initial investment required for theproject is $80,000, and the project's cost of capital is 15%. The risk-free interest rate is 5%.Suppose that to raise the funds for the initial investment the firm borrows $40,000 at the risk-freerate and issues new equity to cover the remainder. In this situation, the cost of capital for the firm'slevered equity is closest to:

A company's average after-tax cost of capital from all sources, including common stock, preferred…

Answered: Consider a project with free cash flows…

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter11: Capital Budgeting And Risk

Section: Chapter Questions

Problem 20P

See similar textbooks

Similar questions

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%. a. Assume that to raise the funds for the initial investment the firm borrows $80,000 at the risk-free rate, calculate the value of the firm's levered equity. b. Assume that to raise the funds for the initial investment the firm borrows $30,000 at the risk-free rate and issues new equity to cover the remainder. Suppose we end up with a weak economy one year from now. What will be the cash flow that equity holders receive?
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%. c. Suppose that to raise the funds for the initial investment the firm borrows $45,000 at the risk-free rate and issues new equity to cover the remainder. In this situation, calculate the value of the firm's levered equity from the project. What is the cost of capital for the firm's levered equity? d. What is the basic goal of financial management with respect to capital structure? Is there an easily identifiable capital structure that will maximize the value of the firm? Why or why not?
Use the information for the question(s) below. Consider a project with free cash flows in one year of $92,380 in a weak economy or $117,423 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 to raise the funds for the initial investment the firm borrows $40,000 at the risk-free rate and issues new equity to cover the remainder. In this situation, the cost of capital for the firm's levered equity is closest to (%) (2 decimal places):
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 $40 000, and the project's cost of capital is 15.9%. The risk-free interest rate is 5%. Suppose that to raise the funds for the initial investment the firm borrows $20 000 at the risk-free rate and issues new equity to cover the remainder. In this situation, the value of the firm's levered equity from the project is closest to: a. $49301 b. $89301 c. $83500 d. $69301 Suppose an investment is equally likely to have a 37.9% return or a -20% return. The total volatility of returns is closest to: O a. 28.95% b. 8.38% c. 20.47% d. 40.94% Clear my choice
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 $60,000 in financing the project. According to MM, the firm's equity cost of capital will be closest to: 45% 30% 35% 25%
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 $30,000 in financing the project. According to MM proposition II, the firm's equity cost of capital will be closest to: A. 15% B. 25% C. 17% D. 20%
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%. • What is the NPV for this project?• 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. What is the market value of the unlevered equity?
Consider a project with free cash flows in one year of $130,000 in a weak market or $180,000 in a strong market, with each outcome being equally likely. The initial investment required for the project is $100,000, and the project's unlevered cost of capital is 20%. The risk-free interest rate is 10%. (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 $100,000 is instead raised by borrowing at the risk-free interest rate. What are the cash flows of the levered equity in a weak market and a strong market at the end of year 1, and what is its initial market value of the levered equity according to MM? Assume that the risk-free rate remains at its…
Consider an entrepreneur who plans to invest in a project that requires an initial investment of $1,800 this year. The project will generate either $1,600 or $4,200 next year. The cash flows of the project depend on whether the economy is weak or strong. Both scenarios are equally likely. The risk-free rate is 4% and the risk premium of the project is 12%. Assume perfect capital markets. Now assume that the entrepreneur will borrow $400 at 5% interest rate to finance the project. The cost of equity of the project is closest to: 16.60% 17.72% 18.29% 19.43% None of the above
Consider a project with free cash flows in one year of $95,000 in a weak economy or $120,000 in a strong economy, with each outcome being equally likely. The initial investment required for the project is $90,000, and the project's cost of capital is 12%. The risk-free interest rate is 6%. i. Suppose that you borrow only $20,000 in financing the project. According to Modigliani Miller's proposition II, the firm's equity cost of capital will be: ii.Suppose that you borrow only $50,000 in financing the project. According to Modigliani Miller's proposition II, the firm's equity cost of capital will be closest to:
Celestial Crane Cosmetics is analyzing a project that requires an initial investment of $3,225,000. The project's expected cash flows are: Year Cash Flow Year 1 $375,000 Year 2 -125,000 Year 3 500,000 Year 4 400,000 If the company's WACC is 8% and the project has the same risk as the firm's average project, what is the project's modified internal rate of return (MIRR)? Should you accept or reject this project?
You currently have $50,000 in cash. You have access to a project which requires an initial investment of $50,000. One year from now this project will pay either $40,000 with a probability 50% or $100,000 with probability 50%. After this, there are no further cash flows. Assume risk neutrality and an annual discount rate of 10%. This is also the risk-free rate. (a) What is the NPV of this project? (b) Suppose you decide to finance this project with your own cash. How much money do you expect to have one year from now? (c) You have found investors who will fund the full cost of the project through equity. You will invest your cash at a risk-free rate. What is the share of equity they will ask for? How much money do you expect to have one year from now? (d) You have found investors who will give you a loan for the full cost of the project. You will invest your cash at a risk-free rate. Assume in case of default, these investors can claim all of the project's cash flows, but cannot claim…

SEE MORE QUESTIONS

Recommended textbooks for you

EBK CONTEMPORARY FINANCIAL MANAGEMENT

Finance

ISBN:

9781337514835

Author:

MOYER

Publisher:

CENGAGE LEARNING - CONSIGNMENT

Intermediate Financial Management (MindTap Course…

Finance

ISBN:

9781337395083

Author:

Eugene F. Brigham, Phillip R. Daves

Publisher:

Cengage Learning

EBK CONTEMPORARY FINANCIAL MANAGEMENT

Finance

ISBN:

9781337514835

Author:

MOYER

Publisher:

CENGAGE LEARNING - CONSIGNMENT

Intermediate Financial Management (MindTap Course…

Finance

ISBN:

9781337395083

Author:

Eugene F. Brigham, Phillip R. Daves

Publisher:

Cengage Learning

SEE MORE TEXTBOOKS