Suppose now it is April 1, 1976, 29 days before the debt matures. Frank Ace,...
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Finance
Suppose now it is April 1, 1976, 29 days before the debt matures. Frank Ace, Jr. (CEO and son of the founder) is offered a "Handheld King" project: an investment project that requires $10 million cash initial investment.
The "Handheld King" project is very risky: 1/38 chance it is profitable, returning a cash flow worth 36 times of the initial investment almost immediately (i.e., if Frank invests $10 million cash into this project, the payoff would be 36*$10 million). However, 37 out of 38 chances, the project will generate zero cash flow.
1. The expected NPV of the "Handheld King" project is $____ million (provide your numerical answer below to fill in the blank).
2. Suppose that Frank decides to invest the $10 million cash into this project. The expected value of equity is $___million (provide your numerical answer below to fill in the blank).
3. Suppose that Frank decides to invest the $10 million cash into this project. The expected value of debt is $___million (provide your numerical answer below to fill in the blank).
4. Suppose that Frank decides to invest the $10 million cash into this project. The expected value of the firm is $___million (provide your numerical answer below to fill in the blank).
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