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

question 11

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 to the levered equity holders?

• A)$20 million
• B)$120 million
• C)$15 million
• D)none of the above

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Definitions:

Tax Imposed

An obligatory financial charge or other type of levy imposed upon a taxpayer by a governmental organization in order to fund government spending and various public expenditures.

Grapefruit

A citrus fruit known for its slightly bitter and sour taste, often eaten as part of breakfast or used in cooking.

Equilibrium Price

The price at which the quantity of goods supplied is equal to the quantity of goods demanded.

Inverse Demand Function

A function that expresses the price of a good or service as a function of the quantity demanded, typically used in economics to determine pricing strategies.