Use the Information for the Question(s)below

question 3

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 $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:

Oversubscription Privilege

Allows shareholders to purchase unsubscribed shares in a rights offering at the subscription price.

Rights Offering

An opportunity for existing shareholders to purchase additional shares of a company at a predetermined price before the company offers them to the general public.

Underwriting Provision

A term in an agreement that outlines the responsibilities and risks taken by an underwriter in facilitating a public offering of securities.

Private Placements

A method of raising capital through the sale of securities to a small number of selected investors rather than through a public offering.