A New Business Opportunity Has a 70% Chance of Being

question 26

Multiple Choice

A new business opportunity has a 70% chance of being worth $500,000 next year and a 30% chance of being worth $100,000. The appropriate expected rate of return is 10%.
-Refer to the information above. The new opportunity will be financed with a $150,000 bank loan. What rate of return will the levered equity holder earn if the business pays off only
$100,000? Round your answer to the nearest tenth of a percent.

• A)-100.0%
• B)-48.8%
• C)-55.2%
• D)This cannot be determined without knowing how much equity was invested in the business.

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Definitions:

Term Bonds

Bonds that have a fixed maturity date on which the principal amount is due to be paid back to investors in full.

Serial Bonds

Bonds issued by a corporation or government that are scheduled for repayment at a series of future dates.

Installment Note

A loan that requires regular payments, or installments, of principal and interest over a set period of time.

Issuing Company

A company that offers its securities for sale to the public or to private investors.