Consider a project with free cash flows inone year of $90,000 in a weak economy or$117,000 in a strong economy, with eachoutcome being equally likely. The initialinvestment required for the project is$80,000, and the project's cost of capital is15%. The risk-free interest rate is 5%.Suppose that to raise the funds for the initialinvestment the firm borrows $80,000 at therisk free rate, then the cost of capital for thefirm's levered equity is closest to:A) 45%B) 25%C) 15%D) 95

Consider a project with free cash flows inone year of $90,000 in a weak economy or$117,000 in a strong economy, with eachoutcome being equally likely. The initialinvestment required for the project is$80,000, and the project's cost of capital is15%. The risk-free interest rate is 5%.Suppose that to raise the funds for the initialinvestment the firm borrows $80,000 at therisk free rate, then the cost of capital for thefirm's levered equity is closest to:A) 45%B) 25%C) 15%D) 95

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter14: Real Options

Section: Chapter Questions

Problem 4MC

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Consider a project with free cash flows in one year of $90,000 in a weak economy or $117,000 in a strong economy, with each outcome being equally likely. The initial investment required for the project is $80,000, and the project's cost of capital is 15%. The risk-free interest rate is 5%. • What is the NPV for this project?• 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. What is the market value of the unlevered equity?
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