Question
Q10Consider a project with free cash flows in one year of $90,000 in a weak economy or $117,000in a strong economy, with each outcome being
Q10Consider a project with free cash flows in one year of $90,000 in a weak economy or $117,000in a strong economy, with each outcome being equally likely. The initial investment required forthe project is $80,000, and the projects cost of capital is 15%. The riskfree interest rate is 5%.
1. Determine if it is worth to undertake the above project.
2. Suppose that to raise the funds for the initial investment, the project is sold to investors asan allequity firm. The equity holders will receive the cash flows of the project in one year.Determine the market value of the unlevered equity for this project.
3. Suppose that to raise the funds for the initial investment the firm borrows $80,000 at therisk free rate. Determine the cash flow that equity holders will receive in one year in a weak economy.
4. Suppose that to raise the funds for the initial investment the firm borrows $80,000 at the riskfree rate. Determine the value of the firms levered equity from the project.
5. Suppose that to raise the funds for the initial investment the firm borrows $80,000 at the riskfree rate. Determine the cost of capital for the firms levered equity.
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