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:

Scatterplot

A graphical representation in which two variables are plotted along two axes, helping to show the relationship between them.

Positive

Characterized by or displaying affirmation, agreement, or constructive qualities or results.

Relationship

How two or more ideas, objects, or persons are related, or the status of being in relation.

Correlation Coefficient

A statistical measure that calculates the strength and direction of a linear relationship between two variables.