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 $80,000, and the project's cost of capital is 15%. The risk-free interest rate is 5%.

Suppose that you borrow only $40,000 at risk free rate and issues new equity to cover the remainder the firm's equity cost of capital will be closest to?

(Please show formulas, step-by-step process AND no excel spreadsheet)

Answer 1

Particulars	Amount
Week economy	90,000
Strong economy	117,000
Average	103,500
Less: debt and interest payment	(42,000)
Equity payment	61,500
/ Equity investment	40,000
	1.5375
Less:	-1
Equity cost of capital	53.75%

Equity cost of capial is

53.75%

please rate.