Consider a project with free cash flows in one year of $130,000 or $180,000, with each outcome

being equally likely. The initial investment required for the project is $100,000, and the project's

cost of capital is 20%. The risk-free interest rate is 10%.

c. Suppose the initial $100,000 is instead raised by borrowing at the risk-free interest rate. What

are the cash flows of the levered equity, and what is its initial value according to MM?

Debt payments =100,000, equity receives 20,000 or 70,000.

Initial value, by MM, is 129,167-100,000 = $29,167

Please explain the process of calculation. Why equity receives 20000 or 70000, not 30000 or 80000 ?