Use the Information for the Question(s)below

question 41

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 $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%.

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Definitions:

Innovation

The process of creating new ideas, products, or methods, which can significantly change market dynamics or societal practices.

Annual Interest Rate

The percentage of the principal amount of a loan that is charged as interest to the borrower for one year.

Interest

The cost of borrowing money, typically expressed as an annual percentage of the loan amount.

Net Income

The total profit of a company after all expenses and taxes have been subtracted from revenue.