Question
Using the Modigliani-Miller (MM) theory in a perfect market, you want to evaluate a project and how to finance it. The project has free cash
Using the Modigliani-Miller (MM) theory in a perfect market, you want to evaluate a project and how to finance it. The project has free cash flows in one year of $90 in a weak economy or $120 in a strong economy. There is 75% chance that the economy is strong. The initial investment required for the project is $80, and the project's cost of capital is 10%. The risk-free interest rate is 5%. Suppose that to raise the funds for the initial investment, the project is sold to investors as an all-equity firm. For the net present value (NPV) of the project and the market value of the unlevered equity, which of the following statements is correct?
| A. | The NPV is $29.55 and the market value of the unlevered equity is $102.27
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| B. | The NPV is $22.27 and the market value of the unlevered equity is $22.27 | |
| C. | The NPV is $22.27 and the market value of the unlevered equity is $102.27 | |
| D. | The NPV is $29.55 and the market value of the unlevered equity is $22.27 |
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