The expected cash flows of a project have been estimated to 200 million per year forever. There is uncertainty. Investors are not quite sure whether the cash flows are 150 million or 250 million per year, and assess an equal probability (1/2) to each scenario. (Do not use excel).
(a) The firm is half financed with risk-free debt at rate 5%. If the discount rate on equity is 15%, what is net income?
(b) If shareholders are positively surprised, what is return on equity (ROE)?
(c) If shareholders are negatively surprised, what is return on assets? 13
(d) What is return on debt in respective state?
(e) What is the risk-free rate and what is the operating risk premium?