Your Perfect Assignment is Just a Click Away

We Write Custom Academic Papers

From as Little as $6

100% Original, Plagiarism Free, Customized to your instructions!

glass
pen
clip
papers
heaphones

 

Consider a project with free cash flows in one year of ​$144,100
or ​$186,700​,
with each outcome being eq

 

Consider a project with free cash flows in one year of ​$144,100
or ​$186,700​,
with each outcome being eq

 

Consider a project with free cash flows in one year of ​$144,100
or ​$186,700​,
with each outcome being equally likely. The initial investment required for the project is ​$92,300​,
and the​ project’s cost of capital is 24%.
The​ risk-free interest rate is 7%.
 

a. What is the NPV of this​ project?

b. Suppose that to raise the funds for the initial​ investment, the project is sold to investors as an​ all-equity firm. The equity holders will receive the cash flows of the project in one year. How much money can be raised in this way—that
​is, what is the initial market value of the unlevered​ equity?  

c. Suppose the initial ​$92,300
is instead raised by borrowing at the​ risk-free interest rate. What are the cash flows of the levered​ equity, what is its initial value and what is the initial equity according to​ MM?

 a. What is the NPV of this​ project?The NPV is ​$enter your response here. ​ (Round to the nearest​ dollar.)

Part 2

b. Suppose that to raise the funds for the initial​ investment, the project is sold to investors as an​ all-equity firm. The equity holders will receive the cash flows of the project in one year. How much money can be raised in this way—that ​is, what is the initial market value of the unlevered​ equity?  The initial market value of the unlevered equity is ​$enter your response here.  ​(Round to the nearest​ dollar.)

Part 3

c. Suppose the initial ​$92,300 is instead raised by borrowing at the​ risk-free interest rate. What are the cash flows of the levered​ equity, what is its initial value and what is the initial equity according to​ MM? 

The cash flows of the levered equity and its initial values according to MM​ are:  ​(Round to the nearest​ dollar.) Date 0Date 1Initial ValueCash Flow Strong EconomyCash Flow Weak EconomyDebt​$92,300​$enter your response here​$enter your response hereLevered Equity​$enter your response here​$enter your response here​$enter your response here
 

 

You are an entrepreneur starting a biotechnology firm. If your research is​ successful, the technology can be sold for $25
million. If your research is​ unsuccessful, it will be worth nothing. To fund your​ research, you need to raise ​$3.4
million. Investors are willing to provide you with ​$3.4
million in initial capital in exchange for 45%
of the unlevered equity in the firm.
a. What is the total market value of the firm without​ leverage?
b. Suppose you borrow ​$0.8
million. According to​ MM, what fraction of the​ firm’s equity will you need to sell to raise the additional ​$2.6
million you​ need?
c. What is the value of your share of the​ firm’s equity in cases ​(a​)
and ​(b​)?