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10 8. Suppose there are no taxes and no transaction costs. Investors and firms can trade the same set of securities at competitive market prices
10 8. Suppose there are no taxes and no transaction costs. Investors and firms can trade the same set of securities at competitive market prices equal to the present value of their future cash flows. A biotechnology company initiates new medicine development project for a year. The amount of initial investment is $20,000. The company expects to generate cash flow $32,000 and $16,000. These cash flows depend on their success of development and of marketing activities. The chance of successful and undesirable cash generation is 80% and 20%, respectively. Currently, the annual effective risk-free rate is 4% and the risk premium is 9%. (a) [2.5 points] Calculate the expected NPV of this project. (b) [2.5 points) If the project is financed using equity alone, how much would the shareholders be willing to pay for this project
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