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Consideraprojectwithfreecashflowsinoneyearof$130,000or$180,000,witheachoutcomebeingequallylikely.Theinitialinvestmentrequiredfortheprojectis$100,000,andtheproject'scostofcapitalis20%.Therisk-freeinterestrateis10%.

1. WhatistheNPVofthisproject?
2. Supposethattoraisethefundsfortheinitialinvestment, theprojectissoldtoinvestorsasanall-equity firm. The equity holderswillreceive the cashflowsof the project inone year. Howmuchmoneycanberaisedinthiswaythatis,whatistheinitialmarketvalueoftheunleveredequity?
3. Supposetheinitial$100,000isinsteadraisedbyborrowingattherisk-freeinterestrate.Whatarethecashflowsoftheleveredequity,andwhatisitsinitialvalueaccordingtoMM?

AcortIndustriesownsassetsthatwillhavean80%probabilityofhavingamarketvalueof$50millioninoneyear.Thereisa20%chancethattheassetswillbeworthonly$20million.Thecurrentrisk-freerateis5%,andAcort'sassetshaveacostofcapitalof10%.

1. IfAcortisunlevered,whatisthecurrent marketvalueofitsequity?
2. SupposeinsteadthatAcorthasdebtwithafacevalueof$20milliondueinoneyear.AccordingtoMM,whatisthevalueofAcort'sequityinthiscase?
3. What is the expected returnofAcort's equity without leverage?
4. Whatis the expected returnofAcort'sequitywithleverage?
5. WhatisthelowestpossiblerealizedreturnofAcort'sequitywith leverage?
6. What is the lowest possible realized return of Acort's equity without leverage?

SupposeAlphaIndustriesandOmegaTechnologyhaveidenticalassetsthatgenerateidenticalcashflows.AlphaIndustriesisanall-equityfirm,with10millionsharesoutstandingthattradeforapriceof$22pershare.OmegaTechnologyhas20millionsharesoutstandingaswellasdebtof$60million.

1. AccordingtoMM PropositionI,whatisthestockpriceforOmegaTechnology?
2. Suppose Omega Technology stockcurrently trades for $11 per share. What arbitrageopportunityisavailable?Whatassumptionsarenecessarytoexploitthisopportunity?

Cisoftisahighlyprofitabletechnologyfirmthatcurrentlyhas$5billionincash.Thefirmhasdecidedtousethiscashtorepurchasesharesfrominvestors,andithasalreadyannouncedtheseplans toinvestors.Currently, Cisoftis an all-equity firmwith 5billion shares outstanding. Thesesharescurrentlytradefor$12pershare.Cisofthasissuednoothersecuritiesexceptforstockoptionsgiventoitsemployees.Thecurrent marketvalueoftheseoptionsis$8billion.

1. WhatisthemarketvalueofCisoft'snon-cashassets?
2. Withperfectcapitalmarkets,whatisthemarketvalueofCisoft'sequityafterthesharerepurchase?
3. Whatisthevaluepershare?

SupposeVisaInc.(V)hasnodebtandanequitycostofcapitalof9.2%.Theaveragedebt-to-valueratioforthecreditservicesindustryis13%.Whatwoulditscostofequitybeifittookontheaverageamount ofdebtforitsindustryatacostofdebtof6%?

In mid 2015, Qualcomm Inc. had $11 billion in debt, total equiry capitalization of $89 billion, and an equity beta of 1.43 (as reported on Yahoo!Finance.Included in Qualcomm's assets was $21 billion in cash and resk free securities. Assume that the risk free rate of interest is 3% and the market risk premium is 4%.

1. WhatisQualcomm'senterprisevalue?
2. WhatisthebetaofQualcomm'sbusinessassets?
3. WhatisQualcomm'sWACC?