A Firm Requires an Investment of $18,000 and Will Return

question 20

Multiple Choice

A firm requires an investment of $18,000 and will return $25,000 after one year. If the firm borrows $10,000 at 6%, what is the return on levered equity?

• A) 80%
• B) 64%
• C) 96%
• D) 112%

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Definitions:

Working Capital

The discrepancy between an organization's immediate assets and its short-term obligations, showcasing the business's operational productivity and liquidity over the short term.

Net Present Value (NPV)

The gap between the present value of incoming cash and the present value of outgoing cash during a given period, used in assessing the profitability of an investment.

Internal Rate of Return (IRR)

A financial metric used to estimate the profitability of potential investments, calculating the rate of return at which the net present value of costs equals the net present value of benefits.

Corporate Finance

The area of finance dealing with the sources of funding and the capital structure of corporations, as well as the actions managers take to increase the value of the firm.