1) Consider a project with free cash flows in one year of $127755 or $188497, with each outcome being equally likely. The initial investment required for the project is $104227, and the projects cost of capital is 21%. The risk-free interest rate is 8%.

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. How much money can be raised in this waythat is, what is the initial market value of the unlevered equity?

2)

Company A is currently an all-equity firm with an expected return of 15.29%. It is considering borrowing money to buy back some of its existing shares, thus increasing its leverage.

Suppose the company borrows to the point that its debt-equity ratio is 1.60. With this amount of debt, the debt cost of capital is 8.45%. What will be the expected return of equity after this transaction?