Solved: Value of the firms levered equity from the project, Finance Basics

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Value of the firms levered equity from the project

Problem:

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 firm borrows $80,000 at the risk free rate, then the value of the firm's levered equity from the project is closest to:

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Finance Basics: Value of the firms levered equity from the project

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Finance Basics: Value of the firms levered equity from the project

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