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:

Certificate of Deposit

A savings certificate with a fixed maturity date and specified fixed interest rate, often issued by banks.

Opportunity Costs

The value of the best alternative that must be foregone as a result of choosing a particular option.

Forgoing

The act of giving up something, typically as a sacrifice or in order to choose another option.

Activity

The engagement in tasks or actions aimed at achieving a certain objective or result.