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The payoff of a project can be either $100,000 or $500,000 - with equal probability - in 5 years. The cost of the project is
The payoff of a project can be either $100,000 or $500,000 - with equal probability - in 5 years. The cost of the project is $100,000 today. The appropriate cost of capital is 5% per year. You want to finance the project with bank loan. (a) Calculate the expected payoff of the project in 5 years. (b) Calculate the promised payoff on the loan in 5 years as well as the state contingent returns on the loan. (c) Calculate the present value of your profits (profit on levered equity).
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