Use the Information for the Question(s)below

question 49

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 $80,000 at the risk-free rate,then the cash flow that equity holders will receive in one year in a weak economy is closest to:

• A)$6000.
• B)$10,000.
• C)$0.
• D)$33,000.

Understand the utility of financial ratios in assessing a borrower's default risk and a company's performance.

Grasp the concept and application of different types of financial analyses such as benchmark comparison, time-series, and cross-sectional analyses.

Comprehend the impact of profitability on default risk.

Recognize the tax implications of debt financing.

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Definitions:

Pinocytosis

Process by which vesicle formation brings macromolecules into the cell.

Exocytosis

Process in which an intracellular vesicle fuses with the plasma membrane so that the vesicle’s contents are released outside the cell.

Endocytosis

Process by which substances are moved into the cell from the environment; includes phagocytosis, pinocytosis, and receptor-mediated endocytosis.

Diffusion

The passive movement of particles from an area of high concentration to an area of low concentration.