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This post addresses the levered equity calculation.

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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%.

Suppose that to raise the funds for the initial investment the firm borrows $80,000 at the risk free rate, then the value of the firm's levered equity from the project is closest to:

A. $6,000
B. $0
C. $8,600
D. $10,000

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Solution Summary

The solution provides the correct answer with supporting calculations to determine the value of the firm's levered equity from the project.