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o-na [289]
3 years ago
6

Consider a project with free cash flows in one year of $90,000 in a weak economy or $117,000 in a strong economy, with each outc

ome being equally likely. The initial investment required for the project is $80,000, and the project's cost of capital is 15%. The risk-free interest rate is 5%.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. The market value of the unlevered equity for this project is closest to:A) $94,100B) $90,000C) $86,250D) $98,600
Business
1 answer:
lozanna [386]3 years ago
5 0

Answer:

B) $90,000

Explanation:

The market value of the unlevered equity can be calculated using the following formula:

Expected value = Σpx

Where:

p = the probability of each outcome =50% in this case for both weak and strong economy.

x = the present value of cash flow for each outcome which is $90,000 in case of weak economy and $117,000 in case of strong economy.

Expected value= 0.50(90,000(1+15%)^-1)+0.50(117,000(1+15%)^-1)

                         =0.50(78,260.87)+0.50(101,739.13)

                         =$90,000

So the answer is B) $90,000

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3 years ago
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Malcolm is a professional writer. He has already published many best-sellers. One of his friends expressed interest in knowing m
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Answer:

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Explanation:

  • The option A is best reason because generally a writer doesn't break his or her flow while writing and that is what Malcolm would have done. After, he would have revised his work many times until he was satisfied.
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