Question: Consider a firm whose only asset is a plot of vacant land, and whose only liability is debt of $15 million due in one year.

Consider a firm whose only asset is a plot of vacant land, and whose only liability is debt of $15 million due in one year. If left vacant, the land will be worth $10 million in one year. Alternatively, the firm can develop the land at an upfront cost of $20 million. The developed land will be worth $35 million in one year. Suppose the riskfree interest rate is 10%, assume all cash flows are risk-free, and assume there are no taxes.

a. If the firm chooses not to develop the land, what is the value of the firm’s equity today? What is the value of the debt today?

b. What is the NPV of developing the land?

c. Suppose the firm raises $20 million from equity holders to develop the land. If the firm develops the land, what is the value of the firm’s equity today? What is the value of the firm’s debt today?

d. Given your answer to part (c), would equity holders be willing to provide the $20 million needed to develop the land?

Step by Step Solution

★★★★★

3.47 Rating (163 Votes )

There are 3 Steps involved in it

1 Expert Approved Answer

Step: 1 Unlock

Plan We can find the net income of the firm using the EBIT interest expens... View full answer

Question Has Been Solved by an Expert!

Get step-by-step solutions from verified subject matter experts

Step: 2 Unlock

Step: 3 Unlock

Document Format (1 attachment)

82-B-C-F-C-S (178).docx

120 KBs Word File

Students Have Also Explored These Related Corporate Finance Questions!

Ethel is a retired 75-year-old who has K5, 000, 000 after selling her small business and paying taxes on the sale. She wants to invest this money. Ethel would like the capital to rise faster than...

The TrunkLine Company will earn $60 in one year if it does well. The debt holders are promised payments of $35 in one year if the firm does well. If the firm does poorly, expected earnings in one...

Suppose the risk-free interest rate is 5%. (a) Having $400 today is equivalent to having $Answer in one year? (Round to the nearest cent.) (b) Having $400 in one year is equivalent to having $Answer...

Consider a firm whose only asset is a plot of vacant land, and whose only liability is debt of $15 million due in one year. If left vacant, the land will be worth $10.2 million in one year....

Consider a firm whose only asset is a plot of vacant land, and whose only liability is debt of $15 million due in one year. If left vacant, the land will be worth $9.7 million in one year....

Consider a firm whose only asset is a plot of vacant land, and whose only liability is debt of $14.7 million due in one year. If left vacant, the land will be worth $9.6 million in one year....

Consider a firm whose only asset is a plot of vacant land, and whose only liability is debt of $14.6 million due in one year. If left vacant, the land will be worth $10.1 million in one year....

Consider a firm whose only asset is a plot of vacant land, and whose only liability is debt of $14.6 million due in one year. If left vacant, the land will be worth $10.4 million in one year....

Consider a firm whose only asset is a plot of vacant land, and whose only liability is debt of $15.2 million due in one year. If left vacant, the land will be worth $10.3 million in one year....

Discuss the differences between internal service funds and enterprise funds. Why is it important to distinguish the differences? Provide two examples of each type.

Ontario Resources, a natural energy supplier, borrowed $89.5 million cash on November 1, 2019, to fund a geological survey. The loan was made by Quebec Banque under a short-term financing...

5.8 You plan to invest $1,000 in a corporate bond fund or in a common stock fund. The following table presents the annual return (per $1,000) of each of these investments under various economic...

If x 0 and x 1, and if x is replaced by 1 x everywhere in the expression above, then the resulting expression is equivalent to

See Table 2.5 showing financial statement data and stock price data for Mydeco Corp. a. How did Mydeco's book debt-equity ratio change from 2012 to 2016? b. How did Mydeco's market debt-equity ratio...

Use the data in Problem 8 to determine the change, from 2012 to 2015, in GE's a. Book debt-equity ratio? b. Market debt-equity ratio?

See Table 2.5 showing financial statement data and stock price data for Mydeco Corp. a. Compute Mydeco's PE ratio each year from 2012 to 2016. In which year was it the highest? b. What was Mydeco's...

Competency Establish a change-control process to assure formal approvals. Student Success Criteria View the grading rubric for this deliverable by selecting the This item is graded with a rubric...

Play Money Paper (12 pages) Pretend that you have $10,000 to invest for four weeks. You are to "in Write a report on 1. why you selected the investments you did 2. whether any noteworthy company...

Full-time college students report spending a mean of 31 hours per week on academic?activities, both inside and outside the classroom. Assume the standard deviation of time spent on academic...