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6.42 Under risk neutrality, a factory can be worth $500000 or $1000000 in two years, depending on product demand, each with equal probability. The appropriate

6.42

Under risk neutrality, a factory can be worth $500000 or $1000000 in two years, depending on product demand, each with equal probability. The appropriate cost of capital is 6% per year. The factory can be financed with proceeds of $500000 from loans today. What are the promised and expected cash flows and rates of return for the factory (without a loan), the loan, and the levered factory owner?

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