A Firm Is Worth $50 or $180 with Equal Probability

question 39

Multiple Choice

A firm is worth $50 or $180 with equal probability and is financed with debt that has a face value of $60. It is considering a new project that is equally likely to be worth -$50 or +$40. The cost of capital is 12% for all securities.
-Refer to the information above. What will the bondholder's require as a return on their investment if they fear expropriation?

• A)12.0%
• B)22.2%
• C)36.9%
• D)33.3%

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Definitions:

Genetic Drift

A mechanism of evolution that results in change in the genetic makeup of a population by chance or random events rather than by natural selection.

Gene Flow

The transfer of alleles or genes from one population to another, influencing the genetic composition of the receiving population.

Natural Selection

A process by which organisms better adapted to their environment tend to survive and produce more offspring, driving the evolution of species.

Hardy-Weinberg Equilibrium

A principle stating that the genetic variation in a population will remain constant from one generation to the next in the absence of disturbing factors.