Consider a firm whose only asset is a plot of vacant land, and whose only lability is debt of S15.2 million due in one year. If left vacant, the land will be worth $10.2 million in one year. Alternatively, the firm can develop the land at an up-front cost of $19.6 million. The developed the land will be worth $35.9 million in one year Suppose the risk-free interest rate is 9.7%, assume all cash flows are risk-free, and there are no taxes. a. if the firm chooses n b. What is the NPV of developing the land? c. Suppose the firm raises $19.6 million from the equity holders to develop the land. If the firm develops the land, what is the value of the firm's equity today? What is the value of the firm's debt today? d. Given your answer to part (c), would equity holders be wiling to provide the $19.6 million needed to develop the land? anot to develop the land, v 1 what is the value of the firm's equity today? What is the value of the debt today? a. If the firm chooses not to develop the land, what is the value of the firm's equity today? What is the value of the debt today? If the firm chooses not to develop the land, the value of the equity is S million. (Round to two decimal places.) If the firm chooses not to develop the land, the value of the debt is S million. (Round to two decimal places.)
Consider a firm whose only asset is a plot of vacant land, and whose only lability is debt of S15.2 million due in one year. If left vacant, the land will be worth $10.2 million in one year. Alternatively, the firm can develop the land at an up-front cost of $19.6 million. The developed the land will be worth $35.9 million in one year Suppose the risk-free interest rate is 9.7%, assume all cash flows are risk-free, and there are no taxes. a. if the firm chooses n b. What is the NPV of developing the land? c. Suppose the firm raises $19.6 million from the equity holders to develop the land. If the firm develops the land, what is the value of the firm's equity today? What is the value of the firm's debt today? d. Given your answer to part (c), would equity holders be wiling to provide the $19.6 million needed to develop the land? anot to develop the land, v 1 what is the value of the firm's equity today? What is the value of the debt today? a. If the firm chooses not to develop the land, what is the value of the firm's equity today? What is the value of the debt today? If the firm chooses not to develop the land, the value of the equity is S million. (Round to two decimal places.) If the firm chooses not to develop the land, the value of the debt is S million. (Round to two decimal places.)
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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Transcribed Image Text:b. What is the NPV of developing the land?
The NPV of developing the land is S million. (Round to two decimal places.)
c. Suppose the firm raises $19.6 million from the equity holders to develop the land. If the firm develops the land, what is the value of the firm's equity today? What is the value of the firm's debt today?
If the firm raises $19.6 million from the equity holders to develop the land, the value of equity is $ million. (Round to two decimal places.)
If the firm raises $19.6 million from the equity holders to develop the land, the value of debt is S million. (Round to two decimal places.)
d. Given your answer to part (c), would equity holders be willing to provide the S19.6 million needed to develop the land? (Select the best choice below.)
O A. No. Equity holders will not be willing to accept the deal because for them it is a positive-NPV investment.
O B. Yes. Equity holders will be willing to accept the deal because for them it is a negative-NPV investment.
O C. No. Equity holders will not be willing to accept the deal because for them it is a negative-NPV investment.
O D. Yes. Equity holders will be willing to accept the deal because for them it is a positive-NPV investment.
Transcribed Image Text:Consider a firm whose only asset is a plot of vacant land, and whose only liability is debt of $15.2 million due in one year. If left vacant, the land will be worth $10.2 million in one year. Alternatively, the firm can develop the land at an up-front cost of $19.6 million. The developed the land will be worth $35.9 million in one year.
Suppose the risk-free interest rate is 9.7%, assume all cash flows are risk-free, and there are no taxes.
a. If the firm chooses not to develop the land, what is the value of the firm's equity today? What is the value of the debt today?
b. What is the NPV of developing the land?
c. Suppose the firm raises $19.6 million from the equity holders to develop the land. If the firm develops the land, what is the value of the firm's equity today? What is the value of the firm's debt today?
d. Given your answer to part (c), would equity holders be willing to provide the $19.6 million needed to develop the land?
a. If the firm chooses not to develop the land, what is the value of the firm's equity today? What is the value of the debt today?
If the firm chooses not to develop the land, the value of the equity is S million. (Round to two decimal places.)
If the firm chooses not to develop the land, the value of the debt is $ million. (Round to two decimal places.)
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