2. Stratford Corp. (SC) is considering a new project. SC estimates that there is a...
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2. Stratford Corp. (SC) is considering a new project. SC estimates that there is a 25% probability that cash flows in one year will be $250,000, and a 75% probability the cash flows will be $350,000. The cost of the project is $200,000. The projects cost of capital is 15% and the risk-free rate is 5%.
What is the NPV of the project?
If the $200,000 cost of the project is financed 100% with equity, what is the expected return on the unlevered equity?
If the project is financed with 50% debt (at the risk-free rate), what should the value of the equity be?
What is the expected return on the levered equity?
If the company finances the project with 30% debt (at the risk-free rate), what should the value of the equity be?
What is the expected return on the levered equity?
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