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Homework #3 Name (first, last): 1. Use the information for the question(e) below. (Capital Structure) 10pts Consider a project with free cash flows in one year of 590,000 in a weak economy or $117,000 in a strong economy, with each outcome being equally likely. The initial investment required for the project is $80,000, and the project's cost of capital is 15%. The risk-free interest rate is 5%. 2. The NPV for this project is closest to: 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. The market value of the unlevered equity for this project is closest to: C Suppose that to raise the funds for the initial investment the firm borrows $40,000 at the risk free rate and issues new equity to cover the remainder. In this situation, the cash flow that equity holders will receive in one year in a weak and strong economy are closest to d. Suppose that to raise the funds for the initial investment the firm borrows $40,000 at the risk free rate and issues new equity to cover the remainder. In this situation, the value of the firm's levered equity from the project is closest to: e Suppose that to raise the funds for the initial investment the firm borrows $40.000 at the risk free rate and issues new equity to cover the remainder. In this situation, the cost of capital for the firm's levered equity is closest to Date 0 Initial Value $40,000 Date 1: Cash Flows Strong Date 1. Returns Strong Wek 5% Expected Return 5% Debt Levered Equity Unlevered Equity $90,000 $117,000 590,000 15

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