A firm will give a one-time cash flow of $22,000 after one year. If the project risk requires a return of 11%, what is the levered value of the firm with perfect capital markets?

Question

Quizplus · Accepted Answer

The levered value of the firm with perfect capital markets is the present value of the cash flow, discounted at the risk-adjusted discount rate. The risk-adjusted discount rate is the sum of the risk-free rate and the risk premium. The risk-free rate is assumed to be 5%, and the risk premium is 6% (11% - 5%). Therefore, the risk-adjusted discount rate is 11%. The present value of the cash flow is $22,000 / (1 + 0.11) = $19,820.

A Firm Will Give a One-Time Cash Flow of $22,000