FinanceUsing the Modigliani-Miller (MM) theory in a perfect market, you want to evaluate a project and howto finance it. The project has free cash flows in one year (year 1) of $90 in a weak economy or $120 in astrong economy. There is 25% chance that the economy is strong. The initial investment required forthe project is So, and the project's cost of capital is 10%. The risk free interest rate is 5%. Suppose thatto raise the funds for the initial investment, you can both raise some amount of levered equity andborrow $80 at the risk free interest rate. For the cost of the levered equity and the cost of capital(WACC), which of the following statements is correct?A.The cost of the levered equity is 27.96% and the cost of capital is 10.00%B.The cost of the levered equity is 56.32% and the cost of capital is 15.00%C.The cost of the levered equity is 27.96% and the cost of capital is 15.00%D.The cost of the levered equity is 56.32% and the cost of capital is 10.00%

Modigliani Miller Theory or model was developed by Franco Modigliani and Merton Miller in 1958.…

Answered: Using the Modigliani-Miller (MM) theory…

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

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A project has two possible outcomes. The good outcome returns $9,000 next year and occurs 59% of the time. The bad outcome is total failure, retuming $0 , the rest of the time. If the risk free interest rate is 3.2% , the expected market return is 12.6% , and the project beta is 1.1 , what is the price of the project today?
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You are trying to value the following project for your company. You know that the project will generate free cash flows in perpetuity that will grow at a constant annual rate of 1.5% after year 3. The applicable interest rate for this project is 7.5%. What is the NPV of this project? Express your result in $-millions and round to two decimals (do not include the $-symbol in your answer). If you calculate a negative NPV enter a negative number. Year Free Cash Flows Free Cash Flow Forecasts (in $-millions) 0 -130 Year 1 -1 2 3 24 37
Assume that you have two investment alternatives: the first project produces $125 for sure, and the second project produces $150 with probability 2/5. You can borrow $110 from your financial institution for one project (investment) if you show an asset as a collateral. Suppose that you maximize your expected profit, what would be the minimum level of collateral that make you select the safe project?
A project has a forecasted cash flow of $121 in year 1 and $132 in year 2. The interest rate is 8%, the estimated risk premium on the market is 10.25%, and the project has a beta of 0.61. If you use a constant risk-adjusted discount rate, answer the following: What is the PV of the project? What is the certainty-equivalent cash flow in year 1 and year 2? What is the ratio of the certainty-equivalent cash flows to the expected cash?
Diana, Industries is considering a project which has the following cash flows: Year Cash Flow 0 ? 1 $4,000 2 4,000 3 3,000 4 1,500 The project has a payback period of 2.5 years. The firm’s cost of capital is 12 percent. What is the project’s net present value (NPV)? What does the NPV rule advice regarding this investment opportunity?
an investment under consideration has a payback of six years and a cost of 885000. Assume the cash flows are conventional. If the required return is 12% what is the worst case NPV. Please use excel when showing how you got ther
You are considering a geographic expansion into the European market for Canopy Pharmaceuticals. Below are the incremental cash flows for the Canopy project for you to use in your analysis. Assume Canopy's marginal tax rate is 35%, their cost of capital is 15.7 %, and an expected growth rate of 5% after 2003. Calculate the NPV, IRR, Payback Period. Explain how do you determining the initial cost and the terminal value? (Using Gordon Model to find the terminal)
Suppose your firm is considering investing in a project with the cash flows shown below, that the required rate of return on projects of this risk class is 9 percent, and that the maximum allowable payback and discounted payback statistics for the project are 2.0 and 3.0 years, respectively. Time: 0 1 2 3 4 5 6 Cash flow: −$7,100 $1,000 $2,200 $1,400 $1,400 $1,200 $1,000 Use the IRR decision rule to evaluate this project. (Negative amount should be indicated by a minus sign. Round your answer to 2 decimal places.) Should it be accepted or rejected?multiple choice accepted rejected
Adam Andler Corp is analyzing an average-risk project, and the following data have been developed. Unit sales will be constant, but the sales price should increase with inflation. Fixed costs will also be constant, but variable costs should rise with inflation. The project should last for 3 years. This is just one of many projects for the firm, so any losses on this project can be used to offset gains on other firm projects. What is the project's expected NPV? Do not round the intermediate calculations and round the final answer to the nearest whole number. WACC or cost of capital Net investment cost (depreciable basis) The salvage value of its equipment No other fixed assets will be acquired for following years The company will require an increase in net working capital at the $10,000 beginning The company will liquidate all working capital at the end of the project -10,000 Units sold (constant through years) 60,000 $30.00 $50,000 $17.00 Average price per unit, Year 1 Fixed operating…
What information does the payback period provide? Suppose you are evaluating a project with the expected future cash inflows shown in the following table. Your boss has asked you to calculate the project's net present value (NPV). You don't know the project's initial cost, but you do know the project's regular, or conventional, payback period is 2.50 years. If the project's weighted average cost of capital (WACC) is 9%, the project's NPV (rounded to the nearest dollar) is: $355,048 $287,420 $405,769 $338,141 Which of the following statements indicate a disadvantage of using the regular payback period (not the discounted payback period) for capital budgeting decisions? Check all that apply. The payback period does not take the time value of money into account. The payback period is calculated using net income instead of cash flows. The payback period does not take the project's entire life into account.
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