A Firm Can Be Worth $110 or $180 with Equal

question 39

Multiple Choice

A firm can be worth $110 or $180 with equal probability. The firm's debt consists of a zero-coupon bond with a face value of $110 that matures at the end of one year. Assume risk neutrality and a cost of capital of 10%.
-Refer to the information above. What will the bondholders pay for this debt?

• A)$110.00
• B)$100.00
• C)$131.82
• D)none of the above

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Definitions:

Cross-Price Elasticity

A measurement of how the quantity demanded of one good responds to a change in the price of another good.

Negative

A term often indicating a subtraction, a deficit, or an unfavorable outcome in various contexts.

Unrelated Goods

denotes two or more goods that have no direct connection in consumption or production, implying no cross-price elasticity between them.

Complementary Goods

Products or services that are consumed together because the use of one enhances the use of the other.