Should fountain invest in project horizon

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Reference no: EM132003645

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?

Reference no: EM132003645

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