THIS IS CONSIDERED ONE QUESTION

The Knight Corporation faces the need to raise external funds to undertake a new investment opportunity. By investing $100M Knight will generate a gross return of $140M for sure in the next period and the market knows that. Thus, the NPV of the project is $40M. Unfortunately, Knight has no internal funds and, because of the nature of the business, has to raise funds by issuing equity. The problem is that the market does not know whether the current value of Knight assets is $100M or $20M, and regards both outcomes as equally likely. Assume that the discount rate is zero and Knight's managers are loyal agents of the existing shareholders. a. If the market expects Knight to issue equity and undertake the investment independent of the true value of the company, what is the fraction of the final value of the company that the investors will require to invest $100M in the company? Question 6 1pts b. If Knight's managers know that the true value of Knight's existing assets is 100M, what is the equity value (in millions) of the old investors after new projects are undertaken? Question 7 1 pts c. If Knight's managers know that the true value of Knight's existing assets is 20M, what is the equity value (in millions) of the old investors after new projects are undertaken? Question 8 1 pts d. Suppose instead that the market expects that Knight's managers will issue equity and undertake the investment only when they know that the true value of the company is $20M. What is the fraction of the final value of the company that the investors will require to invest $100M in the company? Question 9 1 pts Under the assumption in (d), if Knight's managers know that the true value of Knight's existing assets is $100M would they want to issue equity? Yes No Question 10 1 pts f. Under the assumption in (d), if Knight's managers know that the true value of Knight's existing assets is $20M, what is the equity value (in millions) of the old investors after new projects are undertaken