Question
Consider a project with free cash flows in one year of $139,715 in a weak market or $167,779 in a strong market, with each outcome
Consider a project with free cash flows in one year of $139,715 in a weak market or $167,779 in a strong market, with each outcome being equally likely. The initial investment required for the project is $90,000, and the project's unlevered cost of capital is 11%. The risk-free interest rate is 3%. A. What is the NPV of this project? B. Suppose that to raise the funds for the initial investment, the project is sold to investors as an all equity firm. The equity holders will receive the cah flow of the project in one year. How much money can be raised in this way, that is what is the initial market value of the unlevered equity? C. Suppose the initial $90,000 is instead raised by borrowing at the risk free interest rate. What are the cash flows of the levered equity in a weak market and a stong market at the end of year 1. and what is its inital market value of the levered equity according to MM?
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