Midlife Crisis Inc. (MCI) has two assets: epsilon1,60 in cash and an investment project. The cash is invested in the risk-free asset which earns 5% per year. The project requires an investment of £800 today and generates an expected cash flow of £1,600 one year from now. This opportunity recurs perpetually each year. Thus, for example, one year from now MCI can again invest £800 and generate epsilon1,600 one year subsequent to that investment. MCI has 800 shares outstanding. The market equity risk premium is 5% per year, and the investment project has a CAPM beta of 1. Assume a Modigliani and Miller world. When answering this question, state any additional assumptions you may need to make. Show your calculations. (a) Should MCI invest in the project? Explain. (b) Suppose MCI's CFO decides to pursue the project. What is the value of MCI? (c) Suppose MCI's CFO decides to take the project and always pay out all free cash flow as a dividend. What is MCI's cum-dividend price expected to be one year from now?
Midlife Crisis Inc. (MCI) has two assets: epsilon1,60 in cash and an investment project. The cash is invested in the risk-free asset which earns 5% per year. The project requires an investment of £800 today and generates an expected cash flow of £1,600 one year from now. This opportunity recurs perpetually each year. Thus, for example, one year from now MCI can again invest £800 and generate epsilon1,600 one year subsequent to that investment. MCI has 800 shares outstanding. The market equity risk premium is 5% per year, and the investment project has a CAPM beta of 1. Assume a Modigliani and Miller world.
When answering this question, state any additional assumptions you may need to make. Show your calculations.
(a) Should MCI invest in the project? Explain.
(b) Suppose MCI's CFO decides to pursue the project. What is the value of MCI?
(c) Suppose MCI's CFO decides to take the project and always pay out all
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