Consider a firm whose only asset is a plot of vacant? land, andwhose only liability is debt of $ 14.8 million due in one year. Ifleft? vacant, the land will be worth $ 10.3 million in one year.?Alternatively, the firm can develop the land at an? up-front costof $ 20.4 million. The developed the land will be worth $ 35million in one year. Suppose the? risk-free interest rate is 9.7%?, ?cash flows are? risk-free, and there are no taxes. a. If thefirm chooses not to develop the? land, what is the value of the?firm's equity? today? What is the value of the debt? today? b. Whatis the NPV of developing the? land? c. Suppose the firm raises $20.4 million from the equity holders to develop the land. If thefirm develops the? land, what is the value of the? firm's equity?today? What is the value of the? firm's debt? today? d. Given youranswer to part ?(c?), would equity holders be willing to providethe $ 20.4 million needed to develop the? land?
