Problem 3 (14 points) Levered Inc’s market value of equity is $60 million and market value of its debt is $50 million. L

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Problem 3 (14 points)
Levered Inc’s market value of equity
is $60 million and market value of its debt is $50 million.
Levered’s pretax cost of debt is 9.0%, while corporate tax rate is
34%. The risk free rate is 4%, while the expected market return is
12%. Levered’s firm level beta is 0.70.
(4 pts)
In part (e) suppose that this
company considers a project that will bring $150,000 at the end of
year 1 and $100,000 at the end of year 2. The initial investment is
$250,000. The project will be financed by the same combination of
debt and equity.
Problem 4 (14 points)
You are considering investment in the
following projects. Assume that your discount rate is 6% per
year.
Project A’s cash flows:
Year 0
Year 1
Year 2
Year 3
-$7,500
$2,300
$3,500
$3,000
Project B’s cash flows:
Year 0
Year 1
Year 2
Year 3
-$9,200
$3,800
$4,100
$2,300