Imagine a firm with one period of operations. In case of a strong economy, the FCF from operations at year 1 will be $2,800. In case of a weak economy, the FCF at year 1 will be $1,800. Both scenarios are equally likely to happen. The risk-free rate is 3% and the equity risk premium is 12% per year. Under these circumstances, if the cost of levered equity is 28%, how much debt financing does the firm use? \begin{tabular}{c} $1,070 \\ \hline$960 \\ \hline$1,110 \\ \hline$1,000 \\ \hline$1,040 \end{tabular}
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