Finance Question

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?)?