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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Definitions:

Scatter Plot

A type of graph or plot which uses Cartesian coordinates to display values for typically two variables for a set of data.

45° Angle

A 45° angle is a measure of angle equal to half of a right angle, commonly encountered in geometry and trigonometry.

Basis For Prediction

The underlying data or rationale upon which a prediction is made.

Correlation

A numeric indicator that shows the degree to which two or more variables change in relation to each other.