$1\mathrm{.}6$ Consider a project with free cash flows in one year of $$90,000$ in a weak economy or $$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 $5\%.$

a$.$ 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. What is the market value of the unlevered equity for this project?

b$.$ Suppose that to raise the funds for the initial investment the firm borrows $$80,000$ at the

risk$-$free rate, then what is the cash flow that equity holders will receive in one year in a

weak economy and in a strong economy? What is the value of the firm's levered equity

from the project?

c$.$ What is the cost of capital for the firm's levered equity?

d$.$ Suppose now 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, what is

the value of the firm's levered equity from the project and what is the cost of capital for

the firm's levered equity?

e$.$ Suppose that two separate firms are considering investing in this project. Firm

"Unlevered" plans to fund the entire $$80,000$ investment using equity, while firm

"Levered" plans to borrow $$45,000$ at the risk$-$free rate and use equity to finance the

remainder of the initial investment. Construct a table detailing the percentage returns to

the equity holders of both the levered and unlevered firms for both the weak and strong

economy. Calculate the total expected return for both the levered and unlevered firms$\mathrm{.}1\mathrm{.}6$ Consider a project with free cash flows in one year of $$90,000$ in a weak economy or $$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 $5\%.$

a$.$ 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. What is the market value of the unlevered equity for this project?

b$.$ Suppose that to raise the funds for the initial investment the firm borrows $$80,000$ at the

risk$-$free rate, then what is the cash flow that equity holders will receive in one year in a

weak economy and in a strong economy? What is the value of the firm$$s levered equity

from the project?

c$.$ What is the cost of capital for the firm's levered equity?

d$.$ Suppose now 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, what is

the value of the firm$$s levered equity from the project and what is the cost of capital for

the firm$$s levered equity?

e$.$ Suppose that two separate firms are considering investing in this project. Firm

$$Unlevered$$ plans to fund the entire $$80,000$ investment using equity, while firm

$$Levered$$ plans to borrow $$45,000$ at the risk$-$free rate and use equity to finance the

remainder of the initial investment. Construct a table detailing the percentage returns to

the equity holders of both the levered and unlevered firms for both the weak and strong economy. Calculate the total expected return for both the levered and unlevered firms.

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