Snowboard Corp is considering a new project. Snowboard estimates that there is a 25% probability...
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Snowboard Corp is considering a new project. Snowboard estimates that there is a 25% probability that cash flows in one year will be $250,000, and a 75% probability the cash flows will be $350,000. The cost of the project is $200,000. The company is considering three options for financing the project.
Option A: Finance the project with 20% debt (at the risk-free rate)
Option B: Finance the project with 40% debt (at the risk-free rate)
Option C: Finance the project with 60% debt (at the risk-free rate)
Put the three options in order from highest to lowest for the expected returns on the levered equity.
a.
Option A, Option B, Option C
b.
Option B, Option C, Option A
c.
Option C, Option B, Option A
d.
Option A, Option C, Option B
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