Question #1 A firm has 500,000 shares outstanding at a price of $100/share so that its market value is (500k)($100) = $50M. The firms investment projects are financed by debt only. Currently the firm is considering an investment project that will cost $1,000,000 and generate cash flows of $500,000, $400,000, $400,000, and $150,000 in years 1 through 4.

(worked out by hand please)

a. (i) If the current required rate of return is 20%, find the present value of the cash flows. Note: This is actually a net present value.

(ii) Based on your answer in part (i), should the firm invest in this project?

b. (i) The Federal Reserve decides to stimulate the economy by purchasing a large quantity of Treasury Securities. The outcome is that the required rate for the firm is now 15%. Find the present value of the cash flows (or net present value) as in part a(i).

(ii) Based on your answer in b(i), should the firm invest in this project?

c. (i) Based on your answer to b(ii), how much value is added to each share?

(ii) If the price of each share was $100 before, how much will it be after news of this investment is made public? Note: Apply Semi-Strong Form EMH.