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

question 37

Multiple Choice

A firm is worth $50 or $180 with equal probability. Management wants to issue a bond that has a face value of $60. The cost of capital for all securities is 12%. If the potential bondholders
Fear that the firm will issue new debt with a face value of $40 that has the same priority as the
$60 debt being sold today, what will they require as a return on their investment?

• A)22.2%
• B)44.9%
• C)49.3%
• D)36.9%

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