11. Axon Industries needs to raise $24.96M for a new investment project. If the firm issues one-year debt, it may haveto pay an interest rate of 9.68 %, although Axon's managers believe that 4.57 % would be a fair rate given the level of risk. If the firm issues equity, they believe the equity may be underpriced by 9.6 %. What should be the undervaluation of equity to match the cost of debt?

a. Suppose you borrow $47,536.12M when financing a gym with a cost of $90,892.57M. You expect to generate a cash flow of $69,283.22M at the end of the year if demand is weak, $96,481.3M if demand is as expected and $110,830.66M if demand is strong. Each scenario is equally likely. The current risk-free interest rate is 4.11% (risk of debt) and there's a 11.97% risk premium for the risk of the assets. What should the value of the equity be?

b. Suppose you borrow $48,100.31M when financing a gym with a cost of $88,069.16M. You expect to generate a cash flow of $60,560.3M at the end of the year if demand is weak, $96,760.93M if demand is as expected and $113,838.03M if demand is strong. Each scenario is equally likely. The current risk-free interest rate is 5.19% (risk of debt) and there's a 10.42% risk premium for the risk of the assets. What is the expected return of equity?