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Consider the entrepreneur described in Section 14.1 (and referenced in Tables 14.1-14.3). Suppose she funds the project by borrowing $750 rather than $500.

EXAMPLES:

TABLE 14.1 The Project Cash Flows

Date 0	Date 1
	Strong Economy	Weak Economy
?$800	$1400	$900

TABLE 14.2 Cash Flows and Returns for Unlevered Equity

Date 0		Date 1: Cash Flows		Date 1: Returns
	Initial Value	Strong Economy	Weak Economy	Strong Economy	Weak Economy
Unlevered equity	$1000	$1400	$900	40%	?10%

TABLE 14.3 Values and Cash Flows for Debt and Equity of the Levered Firm

	Date 0	Date 1: Cash Flows
	Initial Value	Strong Economy	Weak Economy
Debt Levered equity	$500 E = ?	$525 $875	$525 $375
Firm	$1000	$1400	$900

a. According to MM Proposition I, what is the value of the equity? What are its cash flows if the economy is strong? What are its cash flows if the economy is weak? PLEASE EXPLAIN

b. What is the return of the equity in each case? What is its expected return? PLEASE SHOW CALCULATIONS

c. What is the risk premium of equity in each case? What is the sensitivity of the levered equity return to systematic risk? How does its sensitivity compare to that of unlevered equity? How does its risk premium compare to that of unlevered equity? PLEAE EXPLAIN AND SHOW CALCULATIONS

d. What is the debt-equity ratio of the firm in this case? SHOW CALCULATIONS

e. What is the firm's WACC in this case? SHOW CALCULATIONS

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