Use the Information for the Question(s) Below

question 58

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 you borrow only $30,000 in financing the project.According to MM proposition II,the firm's equity cost of capital will be closest to:

• A) 21%
• B) 15%
• C) 20%
• D) 25%

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Definitions:

Stockholders' Equity

Represents the residual interest in the assets of an entity after deducting liabilities, essentially the net worth attributable to shareholders.

Stock Dividend

Distribution of additional shares of a company's stock to its shareholders instead of cash.

Stock Split

A corporate action in which a company divides its existing shares into multiple shares to boost the liquidity of the shares.

Retained Earnings

The portion of net income that is retained by a company rather than distributed to its shareholders as dividends.