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

question 12

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 are the current proportions of debt and equity financing used by the firm?

• A)83.3% debt; 16.7% equity
• B)80% debt; 20% equity
• C)86.5% debt; 13.5% equity
• D)This cannot be determined with the information provided.

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Definitions:

Labor Unions

Organizations formed by workers from related fields that work for the betterment of their members' working conditions, wages, and benefits.

AFL

The American Federation of Labor, a national federation of labor unions in the United States.

Small Employers

Businesses with a relatively small number of employees, which may face different challenges and regulatory standards than larger organizations.

Manufacturing Companies

Businesses involved in the production of goods in large quantities, typically using machinery and involving the assembly of components or the processing of raw materials.