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% . The firm has only this project and $80,000 cash. (Assuming perfect capital market)
(For Q 1-3, please round your answer to the dollar, write as a number, e.g. write "$2,123.45" as "2123")
1. The NPV for this project is $_____;
2. Suppose the firm does not have enough cash, to raise the funds for the initial investment the firm borrows $40,000 at the risk free rate, then the cash flow that equity holders will receive in one year in a weak economy is $_____;
3. Under the same condition as question 2, the initial value of the firm's levered equity is $______;
4. Under the same condition as question 2, the cost of capital for the firm's levered equity is ______%. (Please round to an integer, e.g., write "12.34%" as "12")
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started