Use the Information for the Question(s)below

question 72

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 $40,000 at the risk-free rate and issues new equity to cover the remainder.In this situation,the value of the firm's levered equity from the project is closest to:

• A)$0.
• B)$50,000.
• C)$90,000.
• D)$40,000.

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Definitions:

Buyer

A person or entity that purchases goods or services from another.

Agreement

A mutual understanding or arrangement, typically formalized by a contract, between two or more parties regarding their rights and obligations.

Warranty Of Title

A guarantee provided by a seller to a buyer that they legally own the item being sold and have the right to sell it, free from any claims by others.

Security Interest

A legal claim or lien on property, both real and personal, granted to secure the performance of an obligation, often the repayment of a loan.