Use the Information for the Question(s)below

question 3

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 you borrow $30,000 in financing the project.According to MM proposition II,the firm's equity cost of capital will be closest to:

• A)21%.
• B)15%.
• C)20%.
• D)25%.

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Definitions:

GDP

Gross Domestic Product, the total value of all goods and services produced within a country's borders in a specific time period.

Real GDP

Gross Domestic Product adjusted for inflation, which measures the value of goods and services produced by a country in a year in real terms.

Standard of Living

The measure of affluence, luxury, tangible assets, and vital provisions offered to a chosen demographic or geographical zone.

1965 Ford Mustang

A model of car produced by Ford, marking the first year of production for the Mustang, one of the most iconic American sports cars.