1. Modigliani and Miller's Proposition 1: An unlevered firm raises $10,000 in equity from you to finance its investments. The expected annual EBIT = $2,500 in perpetuity. No other investment in NWC or CAPEX is required, thus expected annual FCF = $2,500 as well. (Remember: no taxes in this world). The required rate of return on firm's assets (investments), ra, is 20% (which is also the required rate of return on firm's (unlevered) equity). (a) Calculate the value of the unlevered firm and the value of firm's equity (formulas and numbers). (b) Recalling that PV = Investment + NPV, how much added value (NPV) is created to the equity-holders (i.e., on top of their book investment)? After raising $10,000 in equity, the firm decides to change its capital structure, by issuing to you a 5% interest perpetual debt for $2,000 and buying back from you $2,000 worth of equity. (c) Using the fact that V1 = EL + DL and PV additivity, calculate the value of the levered firm and the value of the firm's equity (formulas and numbers) (d) Recalling that PV = Investment + NPV, how much added value (NPV) is created now to the equity-holders (i.e., on top of their book investment)? 1. Modigliani and Miller's Proposition 1: An unlevered firm raises $10,000 in equity from you to finance its investments. The expected annual EBIT = $2,500 in perpetuity. No other investment in NWC or CAPEX is required, thus expected annual FCF = $2,500 as well. (Remember: no taxes in this world). The required rate of return on firm's assets (investments), ra, is 20% (which is also the required rate of return on firm's (unlevered) equity). (a) Calculate the value of the unlevered firm and the value of firm's equity (formulas and numbers). (b) Recalling that PV = Investment + NPV, how much added value (NPV) is created to the equity-holders (i.e., on top of their book investment)? After raising $10,000 in equity, the firm decides to change its capital structure, by issuing to you a 5% interest perpetual debt for $2,000 and buying back from you $2,000 worth of equity. (c) Using the fact that V1 = EL + DL and PV additivity, calculate the value of the levered firm and the value of the firm's equity (formulas and numbers) (d) Recalling that PV = Investment + NPV, how much added value (NPV) is created now to the equity-holders (i.e., on top of their book investment)