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Cash flows if the economy is strong

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Reference no: EM131206107

Consider the entrepreneur described in Section 14.1 (and referenced in Tables 14.1-14.3). Suppose she funds the project by borrowing $750 rather than $500.

According to MM Proposition I, what is the value of the equity? What are its cash flows if the economy is strong? What are its cash flows if the economy is weak?

E = $1000 - $750 = $250

CF ($1400) - $500 (1.05) = $612.50 (Strong economy)

CF ($900) - $500 (1.05) = $112.50 (Weak economy)

Reference no: EM131206107

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