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%

---

Definitions:

Net Income

Net income is the total profit of a company after all expenses, taxes, and costs have been deducted from total revenue, indicating the company's financial health over a specified period.

Gross Margin Ratio

A financial metric that demonstrates the proportion of revenue that exceeds the cost of goods sold, expressed as a percentage.

Net Sales

The total revenue from goods or services sold by a company, after deducting returns, allowances for damaged or missing goods, and discounts.

Cost of Goods Sold

The direct costs attributable to the production of the products sold by a company, including material and labor costs.