Use the Information for the Question(s)below

question 96

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 $80,000 at the risk-free rate,then the cost of capital for the firm's levered equity is closest to:

• A)45%.
• B)25%.
• C)15%.
• D)95%.

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Definitions:

Borrow

To receive something from someone with the intention of returning it or its equivalent value at a later date.

Compounded Quarterly

The process of calculating and adding interest to a principal amount every quarter or three months, causing the principal to grow at an increasing rate.

RRSP

In Canada, the Registered Retirement Savings Plan serves as an investment and savings scheme aimed at providing for the retirement needs of employees and self-employed people.

Interest Earned

The amount of money generated as income on an investment, savings, or lending over a specified period.