A project with uncertain return costs 50 to finance today, Ask an Expert

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A project with uncertain return costs $50 to finance today and pays out (next year) $150 with probability .4 and $0 with probability .6. Assume the time premium is 10%. Also assume capital markets are perfect and that all investors are risk-neutral.

a. Assume a manager fully finances this project with a $50 bond. What is the face value of the bond?

b. What is the promised rate on the bond?

c. Now assume the manager finances the project with a $20 bond and finances the remainder by himself. What is the PV of this “levered”equity scheme?

d. True or false: Given the hypotheses, the promised rate on the bond is independent of the amount (i.e. initial value) of the bond.

e. Find the optimal (profit-maximizing) mix of debt and equity for this project.

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Financial Management, Finance

Category:- Financial Management
Reference No.:- M92714948

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