Use the Information for the Question(s)below

question 19

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 cost of capital for the firm's levered equity is closest to:

• A)23%.
• B)25%.
• C)15%.
• D)18%.

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Definitions:

Representativeness Heuristic

A cognitive shortcut that involves making judgments based on how much one thing resembles another.

Creating Subgoals

The strategy of breaking down a goal into smaller, more manageable tasks or objectives that are easier to achieve step by step.

Using Algorithms

The practice of applying a step-by-step procedure or formula for solving problems or performing tasks.

Confirmation Bias

The tendency to search for, interpret, favor, and recall information in a way that confirms one's preexisting beliefs or hypotheses.