question archive Marcel has created a company to develop a new product and is looking for investors
Marcel has created a company to develop a new product and is looking for investors
Subject:FinancePrice: Bought3
Marcel has created a company to develop a new product and is looking
for investors. The company requires an initial investment of 200 million euros. If the product is good (75% probability), the company will generate cash flows of 800 million euros one year from now. If the product is bad (25% probability), the company will generate cash flows of 350 million euros one year from now. Due to the risk of the project, investors require an additional 3% return over the 1% risk-free rate. Assume perfect capital markets.
a)Calculate the NPV of the project. Should the investors invest in the company?
b)If the company is financed with 100% equity, what is its market value today?
c)If the company is financed with 100% equity, what are the equity returns in each scenario? What is the expected equity return?
