Use the Information for the Question(s)below

question 59

Multiple Choice

Use the information for the question(s) below.
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%.
-Suppose that to raise the funds for the initial investment the firm borrows $40,000 at the risk-free rate and issues new equity to cover the remainder.In this situation,the cash flow that equity holders will receive in one year in a strong economy is closest to:

• A)$117,000.
• B)$75,000.
• C)$50,000.
• D)$0.

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Definitions:

Capital Interest

The portion of an investment or equity that represents the initial sum invested or the value contributed by an investor or partner.

Capital Account

A financial record that shows the changes in business ownership over a period. It includes capital contributions and withdrawals by owners.

Partner Capital Accounts

Accounts reflecting the individual investments of partners in a partnership, including their share of profits, losses, and any withdrawals.

Capital Additions

Investments or expenditures made to acquire or improve long-term assets, enhancing the asset value or extending its useful life.