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

question 3

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 payoff on the bond?

• A)$100 million
• B)$130 million
• C)$96.2 million
• D)$120 million

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