Use the Information for the Question(s) Below

question 21

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:

Annual Coupon Payments

The fixed interest payments made by a bond issuer to the bondholders at regular intervals over the life of the bond.

Positive Slope

In graph terms, a positive slope indicates that as one variable increases, the other variable also increases, demonstrating a direct relationship.

Economy

The system of production, distribution, and consumption of goods and services within a particular region or country.

Coupon Rate

A bond's annually paid interest rate, denoted as a percentage of its face value.