Question: HAL Corporation is introducing a new artificial intelligence product. There are three possible outcomes: If the product is highly successful, the company will be worth

  1. HAL Corporation is introducing a new artificial intelligence product. There are three possible outcomes: If the product is highly successful, the company will be worth $900 million, if moderately successful $500 million, if a complete failure $100 million. Each outcome is equally likely. The results will be known two years from today. There are no taxes on income or capital gains.
    1. If the risk-free rate of return is 10%, what is the maximum amount of risk-free debt HAL can issue?
    2. If HALs unlevered equity premium is 8%, what is the unlevered value of HAL today?
    3. What is HALs unlevered cost of capital?
    4. What is HALs cost of capital if it issues $82 million of debt? What is the cost of equity and debt, respectively? Show your calculation.

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