Question
Capital Structure Example Suppose you have an idea for a project that will cost $10,000 upfront but will generate free cash flow of $12,000 next
Capital Structure Example Suppose you have an idea for a project that will cost $10,000 upfront but will generate free cash flow of $12,000 next year. You do not have $10,000 to fund the idea, but your friends are interested in purchasing equity in your venture. You also have the opportunity to borrow $4,000 from the bank at an interest rate of 5%. You estimate the appropriate discount rate for your project is 12%, given its risk. Assume the Modigliani and Miller condition of perfect capital markets holds. 1) What is the NPV of your project? 2) How much can you raise by selling equity in the unlevered project to friends? 3) If you take the bank loan, how much levered equity can you raise? 4) What is expected return on the levered equity?
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