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1. Fountain Corporation has the option to invest in Project Horizon. The project requires an initial investment of $100,000, which can only be raised through new equity. The project will generate $150,000 of cash flows in one year. There are no taxes. Fountain's cost of capital is 10%.
(i) Should Fountain invest in Project Horizon if its objective is to maximize firm value?
(ii) If the firm has to pay debt holders $80,000 in one year and the payment can only come from the payoff of the project mentioned above, would shareholders want to fund this project? Provide an analysis to substantiate your answer.
2. Atlantic Inc. has EBIT of $20m per year in perpetuity. The cost of capital of unlevered firm is 10%. Pacific's current market value of debt is $50mm. Its corporate tax rate is 20% and the expected financial distress costs are $20mm. What is the market value for the company’s equity?
James makes $120,000 a year ($10,000 a month). He pays 30% in taxes and his living expenses are $5,000 a month. He wants to invest the remaining for 30 years at 5%. How much will his portfolio be after 30 years? NOTE that he contributes every month i..
Which has a longer Macaulay’s duration: a zero coupon bond with a two year maturity, or a two year maturity coupon bond that pays 6 percent coupon interest if they both carry a 6 percent market yield? Explain your reasoning.
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You will only invest in the risky portfolio if the expected return is at least
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