Question: Question 3. (10 marks) Consider a firm whose only asset is a plot of vacant land, and whose only liability is debt of $15 million

Question 3. (10 marks) 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 $10.1 million in one year. Alternatively, the firm can develop the land at an upfront cost of $19.6 million. The developed land will be worth $34.3 million in one year. Suppose the risk-free interest rate is 8%, assume all cash flows are riskfree, and assume there are no taxes. a. Calculate the NPV of developing the land. (2 mark) b. Suppose the firm plans to raise $19.6 million from equity holders and develop the land, Calculate the value of the firm's equity and debt today. (4 marks) c. Would equity holders be willing to provide the $19.6 million needed to develop the land? Discuss the general implication of this outcome for firm's capital structure decision. (4 marks)

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