Use the Information for the Question(s)below

question 86

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 project is sold to investors as an all-equity firm.The equity holders will receive the cash flows of the project in one year.The market value of the unlevered equity for this project is closest to:

• A)$94,100.
• B)$90,000.
• C)$86,250.
• D)$98,600.

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Definitions:

Independence

A situation in statistics where two events are not influenced by each other, and the occurrence of one does not affect the probability of occurrence of the other.

Chi-Square Statistic

A statistical measure used to evaluate the differences between observed and expected frequencies in categorical variables.

Observed Frequencies

The number of times a particular value or event actually occurs in a dataset.

Expected Frequencies

In statistical analysis, these refer to the counts predicted by a probability model or theoretical distribution, used in the comparison of observed data for goodness-of-fit tests.