Transcribed Image Text
You've identified a project that would require an initialinvestment this year of $1500, and would generate cash flows ofeither $2400 or $1200 depending on the economy, with either beingequally likely. We're going to use our 'perfect world' approach andassume no taxes and no transaction costs. You demand an 8% marketrisk premium and the risk-free rate is 4%. What is the value ofthis project today and the expected return to equity holders?(company has no debt) You are considering borrowing $300 to helpfinance the project, and can borrow 6%. In this case, what shouldthe price be for the equity portion of the company and what is theexpected return to equity holders? You are interested in boostingyour risk to earn a higher return, and you are consideringborrowing $1200. In this case, what should the price be for theequity portion of the company and what is the expected return toequity holders?