Financing a coffee shop that costs 240,000 to open

Expected cash flow is 345,000 at the end of one year

Given the risk, coffee shop should earn 15%

1)What is the NPV of the project?

2)What is the value of firm?

Suppose you borrow only 60,000 when financing your coffee shop. Current risk free rate is 5%.

According to Modigliani and Miller, what should the value of the equity be? What is the expected return?

Evaluate

Demand

Free cash flows

Strong

420,000

Expected

345,000

Weak

270,000