M4 Consider a project with free cash flows in one yearof $148,100 or $180,200, with each outcome beingequally likely. The initial investment required for theproject is $96,900, and the project's cost of capitalis 16%. The risk-free interest rate is 12%.a. What is the NPV of this project?b. Suppose that to raise the funds for the initialinvestment, the project is sold to investors as anall-equity firm. The equity holders will receive thecash flows of the project in one year. How muchmoney can be raised in this way-that is, what isthe initial market value of the unleveredequity?c. Suppose the initial $96,900 is instead raised byborrowing at the risk-free interest rate. What arethe cash flows of the levered equity, what is itsinitial value and what is the initial equity accordingto MM?

Given, cashflows at weak economy is $148,100 Cash flow at strong economy is $180,200 Cost of…

Consider a project with free cash flows in one year of $148,100 or $180,200, with each outcome being equally likely. The initial investment required for the project is $96,900, and the project's cost of capital is 16%. The risk-free interest rate is 12%.

Consider a project with free cash flows in one year of $148,100 or $180,200, with each outcome being equally likely. The initial investment required for the project is $96,900, and the project's cost of capital is 16%. The risk-free interest rate is 12%.

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter12: Capital Budgeting: Decision Criteria

Section: Chapter Questions

Problem 13P

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Question

Consider a project with free cash flows in one year
of $148,100 or $180,200, with each outcome being
equally likely. The initial investment required for the
project is $96,900, and the project's cost of capital
is 16%. The risk-free interest rate is 12%.
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 $96,900 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?

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