Under risk neutrality a factory can be worth 500000 or, Ask an Expert

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Under risk neutrality, a factory can be worth $500,000 or $1,000,000 in 2 years, depending on product demand, each with equal probability.

The appropriate cost of capital is 6% per year. The factory can be financed with proceeds of $500,000 from loans today.

What are the promised and expected cash flows and rates of return for the factory (without a loan), for the loan, and for a hypothetical factory owner who has to repay the loan first?

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Financial Management, Finance

Category:- Financial Management
Reference No.:- M91991005

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