Consider a project with free cash flows in one year of $90 000 in a weak economy
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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 $40 000, and the project's cost of capital is 16.5%. The risk-free interest rate is 5%. Suppose that to raise the funds for the initial investment the firm borrows $20 000 at the risk-free rate and issues new equity to cover the remainder. In this situation, the value of the firm's levered equity from the project is closest to:
Select one:
a. $88841
b. $68841
c. $83500
d. $48841
Related Book For
Financial Accounting an introduction to concepts, methods and uses
ISBN: 978-0324789003
13th Edition
Authors: Clyde P. Stickney, Roman L. Weil, Katherine Schipper, Jennifer Francis
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