Documente Academic
Documente Profesional
Documente Cultură
b. Break even will occur when Ms. Ketchups expected payoff from Project 2 is equal to
her expected payoff from Project 1. If X is Ms. Ketchups payment on the loan, then
her payoff from Project 2 is: 0.4 (24 X). Setting this expression equal to 15-X (Ms.
Ketchups payoff from Project 1), and solving, we find that: X = 9.Therefore, if Ms.
Ketchup will borrow less than the present value of 9, the payoffs from the second
project will be lower than the payoffs from the first project.
18. We R Toys
0.65
50 = $80
0.1
500 + 80
=
= $58 / share
10
million
0.65
50 = $24
0.1
million
a. NPV of expansion = 20
Equity value
b. NPV of expansion = 4
share price =
500 24
= $47.6 / share
10
new shares =
50
= 1.05
47.6
million shares
500 + 50 + 80 + 17.50 50
= $59.75
10
compared to case (c). $1 = avoid issuing undervalued equity, and $1.75 from
interest tax shield.