Capital Structure. Value Today CF Boom CF Bust Exp. CF Equity Financing 0.75M 1.35M 0.45M 0.9M Debt
Question:
Capital Structure.
| Value Today | CF Boom | CF Bust | Exp. CF |
---|---|---|---|---|
Equity Financing | 0.75M | 1.35M | 0.45M | 0.9M |
Debt Financing | 0.75M | 2.1M | 0 | 1.05M |
We initially get to know that a company is considering raising funds to finance a project. it will either finance it all with equity or all with debt. The state of the economy in a year from now can be a boom or a bust. The shareholders will demand a 20% return while the debtholders will demand a 5% risk-free rate. Then we compared both options to see which of the two choices will leave a higher stake for the entrepreneurs and it seemed like debt was the "better choice"
We need to build a portfolio of bonds and stocks to replicate the project's cash flows to the entrepreneurs. The expected return on the stock market is 40% and the risk-free bond is 5%. The point of using the replicating portfolio is to show that the present value of debt financing and equity financing are equal ( 0,75 million). How can we do this?
Please do not plagiarized.
Basic Business Statistics Concepts and Applications
ISBN: 978-0132168380
12th edition
Authors: Mark L. Berenson, David M. Levine, Timothy C. Krehbiel