Use the Information for the Question(s)below

question 42

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 weak economy is closest to:

• A)$90,000.
• B)$0.
• C)$50,000.
• D)$48,000.

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Definitions:

Ohio Valley

A geographical region in the United States encompassing parts of the states around the Ohio River, significant for its early colonial history and development during westward expansion.

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Conflicts and competition for overseas territories and power among European empires from the 15th to early 20th centuries.

Precious Metals

Naturally occurring metallic elements that are rare and have high economic value, often used for currency, jewelry, and industrial purposes; examples include gold, silver, and platinum.

Neolin

A Delaware prophet who, in the 1760s, advocated for Native American unity and cultural revival as resistance against British colonial rule and encroachment.