1.You are the sole equity owner of B-Team Inc. Currently your firm has no debt. Your firm is expected to generate the following set of cash flows ($'000) in the future

The discount rate for these cash flows is 12%. Notice that in the third year cash flow is negative (-150) indicating that you expect B-Team Inc to undertake a fairly large investment in that year.

a)Suppose first that you expect to pay for this investment in the third year yourself. All other positive cash flows will be paid out to you as a dividend. That is, you will get all positive cash flows and pay for all the costs. What is the present value of B-Team's equity? Hint: simply discount the cash flows given.

b)Suppose instead that B-Team Inc plans to finance the investment by borrowing $150K at the end of the third year. The firm plans to repay this debt (both interest and principal) at the end of the fourth year. For simplicity assume that the firm will borrow at 12%. What is the total payment that the firm will need to make to repay the loan in year 4?

c)Suppose that any surplus cash flows (i.e. over and above what is needed to pay the debt) will be paid out as a dividend to you in each year. What are the cash flows you receive in each year?

d)What is the present value of your equity holdings under the scenario where the firm plans to borrow $150K in the third year? How does this differ from your answer to (a)?