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Company A has just issued a callable (at par) three-year, 5% coupon bond with semiannual coupon payments. The bond can be called at par in two years or anytime thereafter on a coupon payment date. It has a price of $99. What is the bond’s yield to maturity?

a) Company A has just issued a callable (at par) three-year, 5% coupon bond with semiannual coupon payments. The bond can be called at par in two years or anytime thereafter on a coupon payment date. It has a price of $99. What is the bond’s yield to Call?

b) Consider a project with free cash flows in one year of $134,902 or $216,086, with each outcome being equally likely. The initial investment required for the project is $105,212, and the project’s cost of capital is 22%. The risk-free interest rate is 10%. What is the NPV of this project?

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c) Consider a project with free cash flows in one year of $133,197 or $185,635, with each outcome being equally likely. The initial investment required for the project is $104,259, and the project’s cost of capital is 21%. The risk-free interest rate is 8%. Suppose that to raise the funds for the initial investment, the project is sold to investors as an all-equity firm. The equity holders will receive the cash flows of the project in one year. How much money can be raised in this way—that is, what is the initial market value of the unlevered equity?

 
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