Question
Consider a project with free cash flows in one year of $90,000 in a weak economy or $117,000 in a strong economy, with each outcome
Consider a project with free cash flows in one year of $90,000 in a weak economy or $117,000 in a strong economy, with each outcome being equally likely. The initial investment required for the project is $80,000, and the project's cost of capital is 15%. The risk-free interest rate is 5%.
Report the following numbers:
1. NPV for this project
2. 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 cash flows of the project in one year. Calculate present value of equity cash flows (market value of unlevered equity)
3. Suppose that to raise the funds for the initial investment the firm borrows $80,000 at the risk-free rate. Calculate the cash flow that equity holders will receive in one year in a week economy.
4. Calculate the cash flow that equity holders will receive in one year in a strong economy.
5. Calculate present value of levered equity cash flows (market value of levered equity)
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