Consider a project with free cash flow in one year of $139,138 or $187,005, with either outcome being equally likely. The initial investment required for the project is $110,000, and the project's cost of capital is 23%. The risk-free interest rate is 7%. (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 $110,000 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 $ 22578. (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 $132578. (Round to the nearest dollar.) c. Suppose the initial $110,000 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.) Debt Levered Equity Date 0 Initial Value $110,000 Cash Flow Strong Economy $ Date 1 Cash Flow Weak Economy $
Consider a project with free cash flow in one year of $139,138 or $187,005, with either outcome being equally likely. The initial investment required for the project is $110,000, and the project's cost of capital is 23%. The risk-free interest rate is 7%. (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 $110,000 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 $ 22578. (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 $132578. (Round to the nearest dollar.) c. Suppose the initial $110,000 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.) Debt Levered Equity Date 0 Initial Value $110,000 Cash Flow Strong Economy $ Date 1 Cash Flow Weak Economy $
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:Consider a project with free cash flow in one year of $139,138 or $187,005, with either outcome being equally likely. The initial investment required for the project is $110,000, and the project's cost
of capital is 23%. The risk-free interest rate is 7%. (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 $110,000 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 $ 22578. (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 $132578. (Round to the nearest dollar.)
c. Suppose the initial $110,000 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.)
Debt
Levered Equity
Date 0
Initial Value
$110,000
$
Cash Flow Strong Economy
$
GA
Date 1
Cash Flow Weak Economy
$
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