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Imagine a very simple business wherein funds are raised and invested at time 0 and rewards (if any) are reaped at time 1 (the firm ceases to exist after this). There are two possible outcomes, success and failure. If the firm is successful, it will generate a $45,000 in cash. If it is a failure, it will only generate $7,000. At time 0, the firm raises $30,000--$20,000 in equity and $10,000 from pure discount debt (which has a face value of $11,500). There is a 10% chance of failure. Find the current value of the debt and the equity, and their required returns. Using those, find the firm's WACC, ignoring taxes.

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Financial Management, Finance

Category:- Financial Management
Reference No.:- M92868396

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