Use the Information for the Question(s)below

question 48

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 strong economy is closest to:

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

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Definitions:

Representativeness Heuristic

A cognitive short-cut in which instances are assigned to categories or types on the basis of overall similarity or resemblance to the category.

Induced Compliance

A special case of cognitive dissonance: inconsistency is experienced when a person is persuaded to behave in a way that is contrary to an attitude.

Cognitive Dissonance

The psychological discomfort experienced by an individual who holds two or more contradictory beliefs, ideas, or values at the same time.

Inoculation

A way of making people resistant to persuasion. By providing them with a diluted counter-argument, they can build up effective refutations to a later, stronger argument.