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Scenario: Diversification
Morris is considering investing $10,000 in a sunglass company or a rain poncho company. If it is a rainy year and he invests only in the sunglass company, he will lose $5,000. However, if it is a rainy year and he invests only in the rain poncho company, he will earn $10,000. If it is a sunny year and he invests only in the sunglass company, he will earn $10,000; if he invests only in the rain poncho company, he will lose $5,000 in a sunny year. There is a 50% chance of a sunny year and a 50% chance of a rainy year.
-(Scenario: Diversification) Look at the scenario Diversification. If Morris invests all of his money in the rain poncho company, what is his expected gain or loss?
Cost of Debt
The effective rate that a company pays on its current debt, including loans and bonds, which can be measured before or after taxes.
Annual Coupon
The annual interest payment made to bondholders, expressed as a percentage of the bond's face value.
Face Value
The nominal value printed on a bond or stock certificate that indicates the amount due at maturity for bonds or the value of a share of a stock.
After-Tax Cost of Debt
The net cost to a company for borrowing funds after factoring in tax deductions on interest expenses.
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