Consider a firm whose only asset is a plot of vacant? land, andwhose only liability is debt of $ 14.6 million due in one year. Ifleft? vacant, the land will be worth $ 9.6 million in one year.?Alternatively, the firm can develop the land at an? up-front costof $ 20.3 million. The developed the land will be worth $ 34.4million in one year. Suppose the?risk-free interest rate is 9.7 %cash flows are? risk-free, and there are no taxes.
a. If the firm chooses not to develop the? land, what is thevalue of the? firm's equity? today? What is the value of the debt?today?
b. What is the NPV of developing the? land?
c. Suppose the firm raise $ 20.3 million from the equity holdersto develop the land. If the firm develops the? land, what is thevalue of the? firm's equity? today? What is the value of the?firm's debt? today?
d. Given your answer to part ?(c?),would equity holders bewilling to provide the $ 20.3 million needed to develop the?land?
