Consider a project with free cash flows in one year of $132,445 or $168,043, wit
ID: 2749867 • Letter: C
Question
Consider a project with free cash flows in one year of $132,445 or $168,043, with each outcome being equally likely. The initial investment required for the project is $100,641, and the project's cost of capital is 24%. The risk-free interest rate is 7%. The NPV of the project is $20,524 and the intitial market value of the unlevered equity is $121,165.
The cash flows of the levered equity and its initial values according to MM are:
Date 0 Date 1 Date 1 Initial Value Cash Flow Strong Economy Cash Flow Weak Economy Debt $100,641 ? ? Levered Equity ? ? ?
Explanation / Answer
(132445+168043)
2
=150244/1.24
=121164
Date 0 Date 1 Date 1 Initial Value Cash Flow Strong Economy Cash Flow Weak Economy Debt $100,641 168043-100641=67402 132445-100641=31804 Levered Equity(132445+168043)
2
=150244/1.24
=121164
168043-121164=46879 132445-121164=11281