Suppose That USB Corp Has $100m Invested in 8% Risk-Free

question 37

Multiple Choice

Suppose that USB Corp has $100m invested in 8% risk-free bonds that mature in one-year. The company also has $80m in debt outstanding that will also mature in a year. USB shareholders are considering selling the $100m in debt and investing in a project that has a 60% chance of returning $200m and a 40% chance of returning $2m. Agency costs: Given the pay-offs of the project, what does the per cent chance of success need to be in order for the expected value of equity with the project to be equal to the expected value of equity without the project?

• A) 1/3
• B) 1/4
• C) 1/5
• D) 1/6

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Definitions:

Opiate

A subset of opioids, derived from the opium poppy, used primarily for pain relief but also associated with addiction and dependence.

Hypnosis

A trance-like state of focused attention, reduced peripheral awareness, and an enhanced capacity for response to suggestion.

Trancelike State

A semi-conscious state in which a person may be highly responsive to suggestion or direction, often associated with hypnosis.

Coma

A deep state of prolonged unconsciousness, where a person cannot be awakened, fails to respond normally to pain, light, or sound, lacks a normal wake-sleep cycle, and does not initiate voluntary actions.