Growth Inc. has a yearly 5% cash flow at risk of $300 million. An increase...
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Growth Inc. has a yearly 5% cash flow at risk of $300 million. An increase in the equity has a net cost for the firm of 14 percent per year. This equity increase is used as a cushion against losses. Growth Inc. can expand the scale of activities by 15 percent. The firm wants to increase its equity capital so that it could absorb a cash flow shortfall equal to its CaR after expanding its activities, so its probability of default after such a shortfall would be the same as before. How much equity capital does it have to raise? How much must the project earn to be profitable? This is before taking into account the capital required to protect it against losses. (The inverse cumulative standard normal distribution function 1(0.95)=1.65.)
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