Consider a project with free cash flows in one year of $ 133 495 in a...

70.2K

Verified Solution

Question

Finance

Consider a project with free cash flows in one year of $ 133 495in a weak market or $ 199 139 in a strong? market, with eachoutcome being equally likely. The initial investment required forthe project is $ 90 000?, and the? project's unlevered cost ofcapital is 15 %. The? risk-free interest rate is 9 %. ?(Assume notaxes or distress? costs.) a. What is the NPV of this? project? b.Suppose that to raise the funds for the initial? investment, theproject is sold to investors as an? all-equity firm. The equityholders will receive the cash flows of the project in one year. Howmuch money can be raised in this waylong dashthat ?is, what is theinitial market value of the unlevered? equity? c. Suppose theinitial $ 90 000 is instead raised by borrowing at the? risk-freeinterest rate. What are the cash flows of the levered equity in aweak market and a strong market at the end of year? 1, and what isits initial market value of the levered equity according to?MM?

Answer & Explanation Solved by verified expert

4.3 Ratings (971 Votes)

All financials below are in Initial investment C0 90000 Cash flow in year 1 in up state C1u 199139 with probability p 05 Cash flow in year 1 in down state C1d 133495 with probability 1 p 1 05 05 Unlevered cost of capital Ku 15 a What is the NPV of this project NPV C0 p x C1u 1 p x C1d 1 Ku 90000 05 x 199139 05 See Answer

Get Answers to Unlimited Questions

Join us to gain access to millions of questions and expert answers. Enjoy exclusive benefits tailored just for you!

Membership Benefits:

Unlimited Question Access with detailed Answers
Zin AI - 3 Million Words
10 Dall-E 3 Images
20 Plot Generations
Conversation with Dialogue Memory
No Ads, Ever!
Access to Our Best AI Platform: Flex AI - Your personal assistant for all your inquiries!

Become a Member

Transcribed Image Text

Consider a project with free cash flows in one year of $ 133 495in a weak market or $ 199 139 in a strong? market, with eachoutcome being equally likely. The initial investment required forthe project is $ 90 000?, and the? project's unlevered cost ofcapital is 15 %. The? risk-free interest rate is 9 %. ?(Assume notaxes or distress? costs.) a. What is the NPV of this? project? b.Suppose that to raise the funds for the initial? investment, theproject is sold to investors as an? all-equity firm. The equityholders will receive the cash flows of the project in one year. Howmuch money can be raised in this waylong dashthat ?is, what is theinitial market value of the unlevered? equity? c. Suppose theinitial $ 90 000 is instead raised by borrowing at the? risk-freeinterest rate. What are the cash flows of the levered equity in aweak market and a strong market at the end of year? 1, and what isits initial market value of the levered equity according to?MM?