Use the Information for the Question(s)below

question 7

Essay

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 $45,000 at the risk-free rate and issues new equity to cover the remainder.In this situation,calculate the value of the firm's levered equity from the project.What is the cost of capital for the firm's levered equity?

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Definitions:

Systematic Desensitization

A behavioral therapy technique aimed at reducing phobic or anxiety responses through gradual exposure to the feared object or situation, combined with relaxation exercises.

Contingency Contract

A behavioral intervention technique that involves a formal agreement between two parties to reinforce desired behaviors with rewards or consequences.

Token Economy

A system of behavior modification based on the systematic reinforcement of target behavior through the exchange of tokens that can be exchanged for other reinforcements.

Stimulus Satiation

A decrease in responsiveness to a stimulus after repeated presentations.