a.Â What is the NPV of thisâ€‹ project?
b.Â Suppose that to raise the funds for the initialâ€‹ investment, the project is sold to investors as anâ€‹ 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 wayâ€”that
â€‹is, what is the initial market value of the unleveredâ€‹ equity?
c.Â Suppose the initial â€‹$92,300
is instead raised by borrowing at theâ€‹ risk-free interest rate. What are the cash flows of the leveredâ€‹ equity, what is its initial value and what is the initial equity according toâ€‹ MM?
a.Â What is the NPV of thisâ€‹ project?The NPV is â€‹$enter your response here. â€‹ (Round to the nearestâ€‹ dollar.)
b.Â Suppose that to raise the funds for the initialâ€‹ investment, the project is sold to investors as anâ€‹ 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 wayâ€”that â€‹is, what is the initial market value of the unleveredâ€‹ equity? Â The initial market value of the unlevered equity is â€‹$enter your response here. Â â€‹(Round to the nearestâ€‹ dollar.)
c.Â Suppose the initial â€‹$92,300 is instead raised by borrowing at theâ€‹ risk-free interest rate. What are the cash flows of the leveredâ€‹ equity, what is its initial value and what is the initial equity according toâ€‹ MM?
The cash flows of the levered equity and its initial values according to MMâ€‹ are: Â â€‹(Round to the nearestâ€‹ dollar.)Â Date 0Date 1Initial ValueCash Flow Strong EconomyCash Flow Weak EconomyDebtâ€‹$92,300â€‹$enter your response hereâ€‹$enter your response hereLevered Equityâ€‹$enter your response hereâ€‹$enter your response hereâ€‹$enter your response here
You are an entrepreneur starting a biotechnology firm. If your research isâ€‹ successful, the technology can be sold for $25
million. If your research isâ€‹ unsuccessful, it will be worth nothing. To fund yourâ€‹ research, you need to raise â€‹$3.4
million. Investors are willing to provide you with â€‹$3.4
million in initial capital in exchange for 45%
of the unlevered equity in the firm.
a.Â What is the total market value of the firm withoutâ€‹ leverage?
b.Â Suppose you borrow â€‹$0.8
million. According toâ€‹ MM, what fraction of theâ€‹ firm’s equity will you need to sell to raise the additional â€‹$2.6
million youâ€‹ need?
c.Â What is the value of your share of theâ€‹ firm’s equity in cases â€‹(aâ€‹)
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