5. Consider the scenario of perfect capital market assumption. In other words, there is no transaction cost, no tax, and no financial distress cost. 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 software company introduces a new version of anti-virus software available for a year. The amount of initial investment is $15,000. The following table presents the projected cash flow at the end of the year and the chance of possible performance. Year 1 Successful selling Poor selling (70%) (30%) $22,500 $12,000 The cost of capital for this new software development is calculated based on the capital asset pricing model (CAPM). The annual effective risk-free rate is 3%, the expected return of the market is 11%, and the beta of this project is 1.5. The cost of debt for this company is also calculated based on CAPM. The correspond- ing beta is 0.2. In addition, as the company receives high credit rating, the cost of debt remains same even if the leverage increases. (a) [2 points) Calculate the cost of capital for a new product development and the cost of debt. (b) [3 points] Calculate the net present value of this new product development. (c) [3 points) How much amount of capital is raised to realize the return of this project? (d) [4 points] Out of the amount of capital to be raised, the company chooses to raise the debt with $6,000. Calculate the cost of the levered equity. (e) [5 points] Suppose the company chooses to raise the debt with $12,000. Calculate the cost of debt and the cost of the levered equity. (f) [4 points) From scenario assumption and previous question (e), does the value of the levered firm affect? Justify your answer. 5. Consider the scenario of perfect capital market assumption. In other words, there is no transaction cost, no tax, and no financial distress cost. 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 software company introduces a new version of anti-virus software available for a year. The amount of initial investment is $15,000. The following table presents the projected cash flow at the end of the year and the chance of possible performance. Year 1 Successful selling Poor selling (70%) (30%) $22,500 $12,000 The cost of capital for this new software development is calculated based on the capital asset pricing model (CAPM). The annual effective risk-free rate is 3%, the expected return of the market is 11%, and the beta of this project is 1.5. The cost of debt for this company is also calculated based on CAPM. The correspond- ing beta is 0.2. In addition, as the company receives high credit rating, the cost of debt remains same even if the leverage increases. (a) [2 points) Calculate the cost of capital for a new product development and the cost of debt. (b) [3 points] Calculate the net present value of this new product development. (c) [3 points) How much amount of capital is raised to realize the return of this project? (d) [4 points] Out of the amount of capital to be raised, the company chooses to raise the debt with $6,000. Calculate the cost of the levered equity. (e) [5 points] Suppose the company chooses to raise the debt with $12,000. Calculate the cost of debt and the cost of the levered equity. (f) [4 points) From scenario assumption and previous question (e), does the value of the levered firm affect? Justify your
