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:

Ordering Costs

The expenses associated with placing and receiving orders for inventory, including costs related to processing, shipping, and handling.

Accounts Receivable

Receivables from customers for goods or services already supplied by the company but payment has not been made.

Accounts Payable

Liabilities to creditors, representing the obligation to pay for goods and services received, usually within a short period of time.

Economic Order Quantity (EOQ)

A formula used by businesses to determine the optimal order quantity to minimize total inventory costs.