Use next year's Cash Flow Forecast for Blank Company to answer the following questions:
$\begin{array} { | l | l | }
\hline \text { Demand } & \text { Cash Flow } \
\hline \text { Weak } & \$ 25,000 \
\hline \text { Expected } & \$ 35,000 \
\hline \text { Strong } & \$ 45,000 \
\hline
\end{array}$
-Suppose Blank Company has only one project, as forecast above, and an unlevered cost of equity of 8%. If the company borrows $10,000 at 5% to make the investment, what is the expected return to equity holders?

Question

Use next year's Cash Flow Forecast for Blank Company to answer the following questions:
$\begin{array} { | l | l | } 
\hline \text { Demand } & \text { Cash Flow } \
\hline \text { Weak } & \$ 25,000 \
\hline \text { Expected } & \$ 35,000 \
\hline \text { Strong } & \$ 45,000 \
\hline
\end{array}$
-Suppose Blank Company has only one project, as forecast above, and an unlevered cost of equity of 8%. If the company borrows $10,000 at 5% to make the investment, what is the expected return to equity holders?

Quizplus · Accepted Answer

The correct answer is B. The expected return to equity holders is 9.33%. This is calculated as follows:Expected cash flow = $35,000Interest expense = $500Unlevered cost of equity = 8%Levered cost of equity = 9.33%

Use Next Year's Cash Flow Forecast for Blank Company to Answer