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%. Q.1 If two separate firms are considering investing in this project, the firm usingunlevered equity plans to fund the entire investment using equity, while firm using levered plans to borrow $45,000 at the risk-free rate and use equity to finance the remainder of the initial investment. According to MM proposition II, the firm's equity cost of capital will be closest to? Q.2 Please FILL IN THE TABLE and show the percentage returns to the equity holders of both the levered and unlevered firms for both the weak and strong economy?
**ANS Q.2 ONLY**
Consider a project with
Q.1 If two separate firms are considering investing in this project, the firm usingunlevered equity plans to fund the entire investment using equity, while firm using levered plans to borrow $45,000 at the risk-free rate and use equity to finance the remainder of the initial investment. According to MM proposition II, the firm's equity cost of capital will be closest to?
Q.2 Please FILL IN THE TABLE and show the percentage
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