Consider a project with free cash flows in one year of $90,000 in a weak economy

Question

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%.

(c) Suppose that to raise the funds for the initial investment the firm borrows $80,000 at the risk-free rate, then the cash flow that equity holders will receive in one year in a weak economy is closest to:

(1) $6,000
(2) $10,000
(3) $0
(4) $33,000

Explanation / Answer

(c) Suppose that to raise the funds for the initial investment the firm borrows $80,000 at the risk-free rate, then the cash flow that equity holders will receive in one year in a weak economy is closest to:

(1) $6,000
(2) $10,000
(3) $0
(4) $33,000

Related Questions

Navigate

• Browse (All)
• Browse C
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.