Question

Use the following information to answer the next several questions. The Norris Company is looking to fund a new project with capital from both bondholders and shareholders. The project will cost $5,000 with 60% being financed with bonds requiring 5% interest and the remainder with shareholder investment. The company predicts there is a 65% chance the project will be a success worth $9,000. The overall expected cash flow from the project for the Norris Company is $6,725.

Questions:

1) What is the value of the project if it does not turn out to be a success?

2) What is the cash flow to shareholders if the project is a success?

3) What is the expected cash flow for bondholders?

4) What is the expected cash flow to shareholders?

5) What is the expected rate of return for bondholders?

6) What is the expected rate of return for shareholders?

Answer 1

Expected cashflow = ( success xSUCC033 I cashflow probability / failure x failure I cashflow probability f 6725 = ( 9ooox 0.65)+(? x 0.35) rá 6725 = 5850 + (2x0.35) 875 = ?X 0.35.. 2a failure cashflow (2500)

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