Use the information for the question(s) below. Consider a project with free cash flows in one year of $92,380 in a weak economy or $117,423 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%. 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, the cost of capital for the firm's levered equity is closest to (%) (2 decimal places):
Use the information for the question(s) below. Consider a project with free cash flows in one year of $92,380 in a weak economy or $117,423 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%. 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, the cost of capital for the firm's levered equity is closest to (%) (2 decimal places):
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Use the information for the question(s) below. Consider a project with
Transcribed Image Text:Use the information for the question(s) below.
Consider a project with free cash flows in one year of $92,380 in a weak
economy or $117,423 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%.
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, the cost of capital for the firm's levered equity is closest to (%) (2
decimal places):
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