Consider a firm that operates in a perfect capital market. At date 1 the firm generates either a cash flow of 1700 or a cash flow of 500.

Consider a firm that operates in a perfect capital market. At date 1 the firm generates either a cash flow of 1700 or a cash flow of 500. The cash flow depends on whether the economy is in a good state or a bad state. Both scenarios are equally likely. Assume further that the unlevered cost of capital of the firm is 10% and the risk-free rate is equal to 3%.

A) How much risk-less debt can the project support at date 0?

B) Compute the cost of debt for the following initial capital structure: At date 0, the value of equity is equal to E0 = 500 and the value of debt is equal to D0 = 500. What is the corresponding cost of equity? What is the firm’s WACC?

C) Compute the cost of debt for the following initial capital structure: At date 0, the value of equity is equal to E0 = 200 and the value of debt is equal to D0 = 800. What is the corresponding cost of equity? What is the firm’s WACC?

Show more

Calculate Your Essay Price
(550 words)

Approximate price: $22

Calculate the price of your order

550 words
We'll send you the first draft for approval by September 11, 2018 at 10:52 AM
Total price:
$26
The price is based on these factors:
Academic level
Number of pages
Urgency
Basic features
  • Free title page and bibliography
  • Unlimited revisions
  • Plagiarism-free guarantee
  • Money-back guarantee
  • 24/7 support
On-demand options
  • Writer’s samples
  • Part-by-part delivery
  • Overnight delivery
  • Copies of used sources
  • Expert Proofreading
Paper format
  • 275 words per page
  • 12 pt Arial/Times New Roman
  • Double line spacing
  • Any citation style (APA, MLA, Chicago/Turabian, Harvard)

Our guarantees

Delivering a high-quality product at a reasonable price is not enough anymore.
That’s why we have developed 5 beneficial guarantees that will make your experience with our service enjoyable, easy, and safe.

Money-back guarantee

You have to be 100% sure of the quality of your product to give a money-back guarantee. This describes us perfectly. Make sure that this guarantee is totally transparent.

Read more

Zero-plagiarism guarantee

Each paper is composed from scratch, according to your instructions. It is then checked by our plagiarism-detection software. There is no gap where plagiarism could squeeze in.

Read more

Free-revision policy

Thanks to our free revisions, there is no way for you to be unsatisfied. We will work on your paper until you are completely happy with the result.

Read more

Privacy policy

Your email is safe, as we store it according to international data protection rules. Your bank details are secure, as we use only reliable payment systems.

Read more

Fair-cooperation guarantee

By sending us your money, you buy the service we provide. Check out our terms and conditions if you prefer business talks to be laid out in official language.

Read more