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:

Property

Assets or possessions that can be owned or controlled by an individual, corporation, or government, including tangible and intangible items.

Restaurant

A business establishment where meals or refreshments may be purchased.

Hotel

An establishment that provides paid lodging on a short-term basis, often offering various amenities.

Creditor Beneficiaries

A third party who benefits from a contract made between two other parties, specifically when the contract's purpose is to repay a debt.