Consider an entrepreneur with the following investment opportunity. For an initConsider an entrepreneur with the following investment opportunity. For an initial investment of $ $800$ this$$ year, a project will generate cash flows of either $ $1$ comma $400$ next year or $ $900$ next year. The cash flows depend on whether the economy is strong or weak during the$$ year, with both scenarios being equally likely. The market value of the$$ firm's unlevered equity today is $ $1$ comma $000\mathrm{.}00.$ Investors demand a risk premium over the current$$ risk$-$free interest rate of $5\%$ to invest in this project. Given the market risk of the$$ investment, the appropriate risk premium is $10\%.$ The entrepreneur decides to raise part of the initial capital using debt. Suppose she funds the project by borrowing $ $750,$ in addition to selling equity. The debt is$$ risk$-$free.

a$.$ According to MM Proposition$$ I, what is the value of the levered$$ equity? What are its cash flows if the economy is$$ strong? What are its cash flows if the economy is$$ weak?

b$.$ What is the return on equity for the unlevered and the levered$$ investment? What is its expected return for the levered and unlevered$$ investment?

c$.$ What is the risk premium of equity for the unlevered and the levered$$ investment? What is the sensitivity of the unlevered and levered equity return to systematic$$ risk? How does the levered sensitivity compare to the sensitivity of the unlevered equity return to systematic$$ risk? How does its levered risk premium compare to the unlevered risk$$ premium?

d$.$ What is the$$ debt$-$equity ratio of the investment in the levered$$ case?

e$.$ What is the$$ firm's WACC in the levered$$ case?

Question content area bottom

Part $1$

a$.$ According to MM Proposition$$ I, what is the value of the levered$$ equity? What are its cash flows if the economy is$$ strong? What are its cash flows if the economy is$$ weak?

According to MM Proposition$$ I, the value of the levered equity is $$$

$$

enter your response here. $($Round to the nearest$$ cent.$)$

Part $2$

If the economy is strong the cash flows are $$$

$$

enter your response here. $($Round to the nearest$$ cent.$)$

Part $3$

If the economy is weak the cash flows are $$$

$$

enter your response here. $($Round to the nearest$$ cent.$)$

Part $4$

b$.$ What is the return on equity for the unlevered and the levered$$ investment? What is its expected return for the levered and unlevered$$ investment?

The unlevered equity return if the economy is strong is

$$

enter your response here$\%.($Round to two decimal$$ places.$)$

Part $5$

The unlevered equity return if the economy is weak is

$$

enter your response here$\%.($Round to two decimal$$ places.$)$

Part $6$

The levered equity return if the economy is strong is

$$

enter your response here$\%.($Round to two decimal$$ places.$)$

Part $7$

The levered equity return if the economy is weak is

$$

enter your response here$\%.($Round to two decimal$$ places.$)$

Part $8$

The expected return of the unlevered equity is

$$

enter your response here$\%.($Round to two decimal$$ places.$)$

Part $9$

The expected return of the levered equity is

$$

enter your response here$\%.($Round to two decimal$$ places.$)$

Part $10$

c$.$ What is the risk premium of equity for the unlevered and the levered$$ investment? What is the sensitivity of the unlevered and levered equity return to systematic$$ risk? How does the levered sensitivity compare to the sensitivity of the unlevered equity return to systematic$$ risk? How does its levered risk premium compare to the unlevered risk$$ premium?

The risk premium of the unlevered equity is

$$

enter your response here$\%.($Round to two decimal$$ places.$)$

Part $11$

The risk premium of the levered equity is

$$

enter your response here$\%.($Round to two decimal$$ places.$)$

Part $12$

The sensitivity of the unlevered equity return compared to systematic risk is

$$

enter your response here$\%.($Round to two decimal$$ places.$)$

Part $13$

The sensitivity of the levered equity return compared to systematic risk is

$$

enter your response here$\%.($Round to two decimal$$ places.$)$

Part $14$

The sensitivity of the levered equity return compared to the sensitivity of the unlevered equity return is

$$

enter your response here times. $($Round to one decimal$$ place.$)$

Part $15$

The levered risk premium compared to the unlevered risk premium is

$$

enter your response here times. $($Round to one decimal$$ place.$)$

Part $16$

d$.$ What is the$$ debt$-$equity ratio of the investment in the levered$$ case?

The$$ debt$-$equity ratio of the levered investment is

$$

enter your response here times.$($Round to two decimal$$ places.$)$

Part $17$

e$.$ What is the$$ firm's WACC in the levered$$ case?

The$$ firm's WACC in this case is

$$

enter your response here$\%.($Round to two decimal$$ places.$)$

According to MM Proposition I, the value of the levered equity is $$($Round to the nearest cent.$)$If the economy is strong the cash flows are $$($Round to the nearest cent.$)$If the economy is weak the cash flows are $$($Round to the nearest cent.$)$The unlevered equity return if the economy is st