Question: Consider a firm whose only asset is a plot of vacantland, and whose only liability is debt of $15.1 million due in one year. If

Consider a firm whose only asset is a plot of vacantland, and whose only liability is debt of $15.1 million due in one year. If leftvacant, the land will be worth $9.8 million in one year.Alternatively, the firm can develop the land at an upfront cost of $20.4 million. The developed land will be worth $34.4 million in one year. Suppose therisk-free interest rate is 10.4%, assume all cash flows arerisk-free, and assume there are no taxes.

a. If the firm chooses not to develop theland, what is the value of thefirm's equitytoday? What is the value of the debttoday?

b. What is the NPV of developing theland?

c. Suppose the firm raises $20.4 million from the equity holders to develop the land. If the firm develops theland, what is the value of thefirm's equitytoday? What is the value of thefirm's debttoday?

d. Given your answer to part (c), would equity holders be willing to provide the $20.4 million needed to develop theland?

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