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What are the cash flows of the levered equity

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Reference no: EM132781758

Question - Consider a project with free cash flows in one year of $149,400 or $173,100, with each outcome being equally likely. The initial investment required for the project is $94,200, and the project's cost of capital is 15%. The risk-free interest rate is 12%.

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 $94,200 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?

Reference no: EM132781758

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