Rewarding Transportation is considering a project with projected free cash flows in one year of...
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Rewarding Transportation is considering a project with projected free cash flows in one year of either $150,000 with a probability of 40% or $200,000 with a probability of 60%. The initial investment required for the project is $100,000. The project's cost of capital is 18%, and the risk-free rate is 7%.
a. If Web is unlevered, what is the initial market value of the unlevered equity?
b. What is the NPV of the project?
c. If Rewarding finances the project with 50% debt at the risk-free rate, what is the value of the equity?
d. If Rewarding finances the project with 50% debt at the risk-free rate, what is the expected return on the levered equity?
e. If Rewarding finances the project with 60% debt at the risk-free rate, how will the expected return on the levered equity change?
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