Question
2. Stratford Corp. (SC) is considering a new project. SC estimates that there is a 25% probability that cash flows in one year will be
2. Stratford Corp. (SC) is considering a new project. SC estimates that there is a 25% probability that cash flows in one year will be $250,000, and a 75% probability the cash flows will be $350,000. The cost of the project is $200,000. The projects cost of capital is 15% and the risk-free rate is 5%.
If the project is financed with 50% debt (at the risk-free rate), what should the value of the equity be? What is the expected return on the levered equity? $182,609/20.5%
If the company finances the project with 30% debt (at the risk-free rate), what should the value of the equity be? What is the expected return on the levered equity? $222,609/17.6%
Can you explain how to get these answers without excel
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