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Memphic Memphic
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6 years ago
Two separate firms are considering investing in this project.  Firm unlevered plans to fund the entire $80,000 investment using equity, while firm levered plans to borrow $45,000 at the risk-free rate and use equity to finance the remainder of the initial investment.  Construct a table detailing the percentage returns to the equity holders of both the levered and unlevered firms for both the weak and strong economy.
Textbook 
Corporate Finance: The Core

Corporate Finance: The Core


Edition: 4th
Authors:
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#1
6 years ago
Initial Value   C/F Strong Economy   C/F Weak Economy   Returns Strong Economy   Returns Weak Economy
Debt   $45,000    $47,250     $47,250    5%   5%
Levered Equity   $45,000    $69,750     $42,750    55%   -5%
               
Unlevered Equity   $90,000    $117,000     $90,000    30%   0%

PV(equity cash flows) =   = $90,000
C/F (weak economy) = $90,000 (unlevered) - $45,000(1.05) (debt) = $42,750 (levered)
C/F (strong economy) = $117,000 (unlevered) - $45,000(1.05) (debt) = $69,750 (levered)
Returns =
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