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

question 20

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 expected return on the levered equity?

• A)4.0%
• B)12.0%
• C)33.7%
• D)7.7%

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