Use the Information for the Question(s) Below

question 30

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 $60,000 in financing the project.According to MM Proposition II,the firm's equity cost of capital will be closest to:

• A) 45%
• B) 30%
• C) 25%
• D) 35%

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Definitions:

Statute of Fraids

Likely intended to refer to the "Statute of Frauds," which is a legal concept requiring certain types of contracts to be in writing to be enforceable.

Statute of Frauds

The Statute of Frauds is a legal principle that requires certain types of contracts to be in writing and signed by the parties involved, in order to be enforceable.

Hearsay Rule

A legal principle that excludes the use of statements made outside the court to prove the truth of the matter asserted, due to reliability concerns.

English Parliament

The legislative body of the United Kingdom, responsible for making and passing laws.