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:

Interim Financial Report

Financial statements that are issued for periods shorter than a fiscal year, typically quarterly, providing investors and others with an update on a company's financial health.

Gross Profit

The difference between revenue and the cost of goods sold, indicating the profitability of a company's core activities.

Revenue Test

An analysis or criterion used to determine whether a particular source of income qualifies as revenue for accounting or tax purposes.

Profit Or Loss Test

A financial metric used to determine if a business transaction resulted in making a profit or incurring a loss.