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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
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 $90,000, and the project's cost of capital is 15%. The risk-free interest rate is 5%.
Please fill up the following table and show the percentage returns to the equity holders of both the levered and unlevered firms for both the weak and strong economy.
\begin{tabular}{lccccc} \hline & Initial & Cash Flow Strong Value & Cash Flow Weak Economy & Returns Economy & Returns Economy Weak Economy \\ \hline Debt & $45,000 & & & & \\ \hline Levered Equity & $45,000 & & & & \\ \hline \end{tabular} \begin{tabular}{llll} \hline Unlevered Equity & $90,000 & $117,000 & $90,000 \end{tabular}Step by Step Solution
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