Determine your answers to questions 1 3 based on the information provided below:

In one year from now, an investment project has a free cash flow of either 130,000 or 180,000 with equal probabilities. The required investment is 100,000 and the projects unlevered cost of capital is 20%. The risk-free rate of interest is 10%.

Problem 1

In order to finance the project, it is sold as an all-equity project. The projects expected (state- dependent) free cash flow is received in exactly one years time.

What is the current market value of the project? State your answer as a whole number without any decimal points.

Problem 2

What is the net present value of the project? State your answer as a whole number without any

decimal points.

Problem 3

Assume now that the required investment is financed with borrowed funds at an interest rate of 10% (equal to the risk-free rate). The debt is to be fully repaid as the actual free cash flow materialises by the end of the year.

What is the value of the levered equity? State your answer as a whole number without any decimal points.

Determine your answers to questions 4 6 based on the information provided below:

ManuTeX, Ltd has 5 million in cash that will be used to repurchase shares. The plan has already been appropriately announced to the market. ManuTeX is currently an all-equity firm with 5 million shares outstanding, each trading at 12 per share. ManuTeX has not issued any other securities except for stock options granted to employees. The market value of the options is currently 8 million.

Problem 4

What is the market value of ManuTeXs non-cash assets? State your answer as a whole number

without any decimal points.

Problem 5

Assuming perfect capital markets, what is the market value of equity after the repurchase? State

your answer as a whole number without any decimal points.

Problem 6

Assuming perfect capital markets, what is the market value per share immediately following the

announcement of the repurchase program? State your answer to two decimal points.

Determine your answers to questions 7 12 based on the following information:

RosenBall, ASA expects a cash-equivalent EBIT of 200 without any growth in the foreseeable future. The firms overall cost of capital (the required rate of return on assets) is 10%, the applicable tax-rate is 25%, and there are 200 shares outstanding. RosenBalls board of directors are currently looking into the possibility of refinancing the firm by borrowing 900 at an interest rate of 5% per year. The loan is serviced by paying the annual interest, only.

Problem 7

What is currently the all-equity value of RosenBall, ASA? State your answer as a whole number

without any decimal points.

Problem 8

With corporate taxes, only, what is RosenBalls market value following the announcement of the

refinancing plan? State your answer as a whole number without any decimal points.

Problem 9

With corporate taxes, only, what is RosenBalls market value per share following the announcement

of the refinancing plan? State your answer to two decimal points.

Problem 10

With corporate taxes, only, what is RosenBalls market value per share when the actual borrowing

has taken place? State your answer to two decimal points.

Problem 11

If Rosenballs lenders (bond investors) pay tax at a rate of 25% at the margin, while shareholders are tax-exempt, what is the contribution to firm value from leverage (debt)? State your answer as a whole number without any decimal points.

Problem 12

If Rosenballs lenders (bond investors) and shareholders pay tax at marginal rates of 25% and 10%, respectively, what is now the contribution to firm value from leverage (debt)? State your answer as a whole number without any decimal points.