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 expected return to equity holders? Assume the demand is as expected.
A) 8.0%
B) 11.6%
C) 9.33%
D) 30.0%

Question

Quizplus · Accepted Answer

C) Expected cash flow is $35,000. Equity costs $22,407.40 initially 11ea84dc_f50d_6a8a_9a63_418f34536ecd_TB1316_11_TB1316_11 .
The firm must repay 11ea84dc_f50d_6a8b_9a63_4b2ccad6901e_TB1316_11_TB1316_11 to debt holders, so cash flow to equity is 11ea84dc_f50d_6a8c_9a63_3baa9306c926_TB1316_11_TB1316_11 . Expected return to equity is 11ea84dc_f50d_919d_9a63_df71a7117a7b_TB1316_11_TB1316_11 .

Suppose Blank Company Has Only One Project, as Forecast Above