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%.

a) 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,

calculate the value of the firm's levered equity from the project.What is the cost of capital for the firm's levered equity?

b) Suppose that to raise the funds for the initial investment the firm borrows $45,000 at the risk free rate and issues new equity to cover the remainder.In this situation, calculate the value of the firm's levered equity from the project.What is the cost of capital for the firm's levered equity?

c) Explain how the cost of levered equity changes with the debt ratio