An app costs $800 to build and will be worth either $900 or $1400 in one year, depending on the economy (equal chance strong or weak) Let risk free rate be 5% and the risk premium for the app project be 10%.

1. What is the NPV of the investment? Suppose the developer borrows $300and sells $500 of shares to fund the build. (Hint: the developer keeps some shares too)

2. What is the total value of the equity at t=0?

3. What is the expected return on equity?

4. What is the weighted average cost of capital? (aka WACC) 5. Use MM Proposition II to check the cost of equity (which should match #3).