1. An entrepreneur has a project, which required the initial investment of $1000. There is 60% chance that the project will generate cash flow of $1500, and 40% chance that the project will generate cash flow of $800 next year.

a) In market a project with similar risk would require premium is 10% over the risk-free rate of 5.8%, what is the total value of the project? what is the NPV of the project?

b) If the entrepreneur is going to raise equity to finance the project, how much money can he raise?

c) Assuming that the entrepreneur decides to borrow 400 dollars, what is the total value of the project? what is the value of equity now for the project? What is the required rate of return on equity? What is the weighted average cost of capital?

d) Assuming now that the project is 20% financed by debt, what is the total value of the project? What is the expected return on equity now? What is the weighted average cost of capital?

e) Assuming now that the project is 50% financed by debt, what is the total value of the project? What is the expected return on equity now? What is the weighted average cost of capital?

f) Assuming now that the project is 60% financed by debt what is the total value of the project? What is the expected return on equity now? What is the weighted average cost of capital?

g) Assuming now that the project is 80% financed by debt, what is the total value of the project? What is the expected return on equity now? What is the weighted average cost of capital?