Problem 1) John is a successful logistical services firm that currently has $5 billion in cash. John has decided to use this cash to repurchase shares from its investors, and has already announced the stock repurchase plan. Currently John is an all equity firm with 1.25 billion shares outstanding. John's shares are currently trading at $20 per share. The market value of John's non-cash assets is closest to:
- $20 billion
- $19 billion
- $25 billion
- $24 billion
Problem 2) Consider a project with free cash flows in one year of $90,000 in a weak economy or $117,000 in a strong economy, with each outcome being equally likely. The initial investment required for the project is $80,000, and the project's cost of capital is 15%. The risk-free interest rate is 5%. Suppose that to raise the funds for the initial investment, the project is sold to investors as an all-equity firm. The equity holders will receive the cash flows of the project in one year. The market value of the unlevered equity for this project is closest to:
- $94,100
- $90,000
- $86,250
- $98,600