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

question 50

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: What is the expected value of the bonds if the shareholders sell the debt?

• A) $100m
• B) $88.8m
• C) $48.8m
• D) None of the above.

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Definitions:

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The act of arranging or negotiating agreements between two or more parties, often in reference to financial transactions or information exchange.

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A defense mechanism where reasoning is used to block confrontation with an unconscious conflict and its associated emotional stress.

Avenues of Communication

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