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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Criminal Violation

An act that breaches a statute and is punishable by the government through fines, imprisonment, or other penalties.

Illegal Agreement

An agreement that is against the law, and therefore unenforceable by the parties involved.

Exculpatory Clause

A contract provision that relieves one party from liability for harm caused during the execution of the contract.

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Legal responsibility arising from a civil wrong that causes harm or loss to an individual or property, not based on contracts.