Using the Modigliani-Miller (MM) theory in a perfect market, you can identify a current situation in the market as follows. ABC Industries and XYZ Technology have identical assets that generate identical cash flows. ABC Industries is an all-equity firm, with 15 million shares outstanding that trade for a price of $20 per share. XYZ Technology has debt of $100 million as well as 20 million shares outstanding that trade for a price of $8 per share. To exploit this current situation for a risk-free profit, you understand that you can use homemade leverage and should take the following transactions: A. Sell ABC Stock: Buy XYZ Stock: and Lend B. Sell ABC Stock; Buy XYZ Stock; and Borrow C. Buy ABC Stock; Sell XYZ Stock: and Lend D. Buy ABC Stock: Sell XYZ Stock; and Borrow TPG Inc. is evaluating an investment project that lasts for four years. The project has the cost of capital of 15% and requires an initial investment of $5 million today. The size of the annual cash flows will depend on future market conditions. There is a 30% probability that the market conditions will be good, in which case the project will generate free cash flows of $4 million per year during the next four years. There is also a 7095 that the market conditions will be bad, in which case the project will only generate free cash flows of $0.5 million per year for the next four years. While TPG is fairly confident about its cash flow forecast, it recognizes that it will have more information about the market conditions if it delays its investment in the project until next year. This delay also means that the firm will give up one year of positive free cash flows. However, if market conditions are good, the firm will proceed with the investment project; if market conditions are bad, the firm will not proceed with the investment project. The firm estimates that the net present value (NPV) of the project without the option to delay and the NPV of the project with the option to delay would be closest to: A. The NPV of the project without the option to delay is -$3.57 million and the NPV of the project with the option to delay is $3.59 million B. The NPV of the project without the option to delay is -$0.57 million and the NPV of the project with the option to delay is $1.08 million The NPV of the project without the option to delay is -$3.57 million and the NPV of the project with the option to delay is $1.08 million D. The NPV of the project without the option to delay is - $0.57 million and the NPV of the project with the option to delay is $6.42 million ABC Inc. is evaluating an investment project that lasts for three years. The project has the cost of capital of 10% and requires an initial investment of $3 million. There is a 60% chance that the project would be successful and would generate annual free cash flows of $2 million per year during the next three years. There is a 40% chance that the project would be less successful and would generate only $1 million per year during the next three years. However, ABC recognizes that if the project is successful, it could invest $2 million at the end of the second year to expand the project and receive a free cash flow of $4 at the end of the third year. ABC estimates that the net project value (NPV) of the project without the option to expand and the NPV of the project with the option to expand would be closest to: A. The NPV of the project without the option to expand is - $0.51 million and the NPV of the project with the option to expand is $0.81 million B. The NPV of the project without the option to expand is $0.98 million and the NPV of the project with the option to expand is $1.79 million The NPV of the project without the option to expand is - $0.51 million and the NPV of the project with the option to expand is $1.97 million D. The NPV of the project without the option to expand is $1.97 million and the NPV of the project with the option to expand is $3.33 million CapitaliQ is an all-equity firm, which has a pretax cash flow (EBIT) of $5 million each year and it expects that this pretax cash flow is perpetual. The firm has 1 million shares outstanding, the cost of capital of 10%, and the corporate tax rate of 40%. Capitalq plans to announce a leveraged recapitalization plan in which it will borrow $5 million and use these funds to repurchase shares. It also plans to keep its outstanding debt equal to $5 million permanently. After the share repurchase plan, the equity value of CapitaliQ is closest to A. $27.00 million B. $32.25 million C. $29.25 million D. $10.00 million Using the Modigliani-Miller (MM) theory in a perfect market, you can identify a current situation in the market as follows. ABC Industries and XYZ Technology have identical assets that generate identical cash flows. ABC Industries is an all-equity firm, with 15 million shares outstanding that trade for a price of $20 per share. XYZ Technology has debt of $100 million as well as 20 million shares outstanding that trade for a price of $8 per share. To exploit this current situation for a risk-free profit, you understand that you can use homemade leverage and should take the following transactions: A. Sell ABC Stock: Buy XYZ Stock: and Lend B. Sell ABC Stock; Buy XYZ Stock; and Borrow C. Buy ABC Stock; Sell XYZ Stock: and Lend D. Buy ABC Stock: Sell XYZ Stock; and Borrow TPG Inc. is evaluating an investment project that lasts for four years. The project has the cost of capital of 15% and requires an initial investment of $5 million today. The size of the annual cash flows will depend on future market conditions. There is a 30% probability that the market conditions will be good, in which case the project will generate free cash flows of $4 million per year during the next four years. There is also a 7095 that the market conditions will be bad, in which case the project will only generate free cash flows of $0.5 million per year for the next four years. While TPG is fairly confident about its cash flow forecast, it recognizes that it will have more information about the market conditions if it delays its investment in the project until next year. This delay also means that the firm will give up one year of positive free cash flows. However, if market conditions are good, the firm will proceed with the investment project; if market conditions are bad, the firm will not proceed with the investment project. The firm estimates that the net present value (NPV) of the project without the option to delay and the NPV of the project with the option to delay would be closest to: A. The NPV of the project without the option to delay is -$3.57 million and the NPV of the project with the option to delay is $3.59 million B. The NPV of the project without the option to delay is -$0.57 million and the NPV of the project with the option to delay is $1.08 million The NPV of the project without the option to delay is -$3.57 million and the NPV of the project with the option to delay is $1.08 million D. The NPV of the project without the option to delay is - $0.57 million and the NPV of the project with the option to delay is $6.42 million ABC Inc. is evaluating an investment project that lasts for three years. The project has the cost of capital of 10% and requires an initial investment of $3 million. There is a 60% chance that the project would be successful and would generate annual free cash flows of $2 million per year during the next three years. There is a 40% chance that the project would be less successful and would generate only $1 million per year during the next three years. However, ABC recognizes that if the project is successful, it could invest $2 million at the end of the second year to expand the project and receive a free cash flow of $4 at the end of the third year. ABC estimates that the net project value (NPV) of the project without the option to expand and the NPV of the project with the option to expand would be closest to: A. The NPV of the project without the option to expand is - $0.51 million and the NPV of the project with the option to expand is $0.81 million B. The NPV of the project without the option to expand is $0.98 million and the NPV of the project with the option to expand is $1.79 million The NPV of the project without the option to expand is - $0.51 million and the NPV of the project with the option to expand is $1.97 million D. The NPV of the project without the option to expand is $1.97 million and the NPV of the project with the option to expand is $3.33 million CapitaliQ is an all-equity firm, which has a pretax cash flow (EBIT) of $5 million each year and it expects that this pretax cash flow is perpetual. The firm has 1 million shares outstanding, the cost of capital of 10%, and the corporate tax rate of 40%. Capitalq plans to announce a leveraged recapitalization plan in which it will borrow $5 million and use these funds to repurchase shares. It also plans to keep its outstanding debt equal to $5 million permanently. After the share repurchase plan, the equity value of CapitaliQ is closest to A. $27.00 million B. $32.25 million C. $29.25 million D. $10.00 million