Firm A will have cash flows next year of $20m for certain. It has debt of $25m, and cash of $10m. There are no taxes and no discounting. We are in the MM world.

A. What is the EV of Firm A (D+E)_____ show your work below.

B. What is the value of D? _____ and Equity? ______ (show your work below)

4. Same facts as Question 3, but now the firm is considering an investment of $10M which will result in a return of (i) $20m with 40% probability; and (ii) $0 with 60% probability. Assume the MM world of no taxes and no discounting.

A. What is the NPV of the investment?____________

B. What is the value of Equity if the investment is made? ___________

C. What is the value of Debt if the investment is made? _____________

D. Should the Company accept this project and why?

E. What is the difference in the value of E and D from the base case set forth in Question 3? What does this tell you about capital structure?