PART C

Consider a project with free cash flows in one year of $133 506 in a weak market or $198 184 in a strong market, with each outcome being equally likely. The initial investment required for the project is $110 000, and the project's unlevered cost of capital is 17%. The risk-free interest rate is 12%. (Assume no taxes or distress costs.) a. What is the NPV of this project? b. Suppose that to raise the funds for the initial investment, the project is sold to investors as an all-equity firm. The equity holders will receive the cash flows of the project in one year. How much money can be raised in this way that is, what is the initial market value of the unlevered equity? c. Suppose the initial $110 000 is instead raised by borrowing at the risk-free interest rate. What are the cash flows of the levered equity in a weak market and a strong market at the end of year 1, and what is its initial market value of the levered equity according to MM? a. The NPV is $31748. (Round to the nearest dollar.) b. The initial market value of the unlevered equity is $ 141747.9. (Round to the nearest dollar.) c. The cash flows of the levered equity in a weak market and a strong market at the end of year 1, and the initial market value of the levered equity according to MM is: (Round to the nearest dollar.) Date 1 Date 0 Initial value Cash flow strong economy Cash flow weak economy Debt $110 000 $ Levered equity