Question
Consider a project with free cash flow in one year of $141,211 or $193,028, with either outcome being equally likely. The initial investment required for
Consider a project with free cash flow in one year of $141,211 or $193,028, with either outcome being equally likely. The initial investment required for the project is $100,000, and the project's cost of capital is 16%. The risk-free interest rate is 3%. (Assume no taxes or distress costs.)
c. Suppose the initial $100,000 is instead raised by borrowing at the risk-free interest rate. What are the cash flows of the levered equity, and what is its initial value according to M&M?
Date 0 | Date 1 | ||
---|---|---|---|
Initial Value | Cash Flow Strong Economy | Cash Flow Weak Economy | |
Debt | $100,000 | __________ | __________ |
Levered Equity | $44068.53 | __________ | ___________ |
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