A Firm Has 60% Probability of Being Worth $100 Million

question 34

Multiple Choice

A firm has 60% probability of being worth $100 million and a 40% probability of being worth $150 million. There is one bond outstanding that promises to pay $100 million at an interest rate of 4%. The cost of capital for the firm's projects is 8%.
-Refer to the information above. What is the promised return on the bond?

• A)6.4%
• B)5.6%
• C)4.0%
• D)This cannot be determined with the information provided.

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Definitions:

Maturity

The stage of the organization when the business is considered well established.

Inventory

A company's stock of goods or materials, which are held for the purpose of resale or in the production process.

Loan

A sum of money that is borrowed, which must be paid back with interest.

Cash Flows

The total amount of money being transferred into and out of a business, affecting the organization's liquidity, financial health, and operational capabilities.