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Consider a project with free cash flows in one year of $ 134,206 in a weak market or $ 162 150 in a strong market, with each outcome being equally likely. The initial investment required for the project is $ 85 000, and the project's unleveraged cost of capital is 17 %.The risk-free interest rate is 7%.

(Assume there are no taxes or distress costs.)

Suppose the initial $ 85 000 is instead raised by borrowing at the risk-free interest rate. What are the cash flows of the levered equity in a weak market and a strong market at the end of year 1, and what is its initial market value of the levered equity according to MM?

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Financial Management, Finance

Category:- Financial Management
Reference No.:- M92379919

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