Suppose That UBM Corp

question 7

Multiple Choice

Suppose that UBM Corp. has invested $100 million in 8% risk-free bonds that mature in one-year. The firm also has $80 million in debt outstanding that will also mature in a year. UBM shareholders are considering selling the $100 million in debt and investing in a project that has a 60% chance of returning $200 million and a 40% chance of returning $2 million. What will the equity value of UBM be in one-year without stockholders taking on the project?

• A) $100 million
• B) $80 million
• C) $20 million
• D) $8 million

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Definitions:

Flexible Prices

A characteristic of markets where prices can change easily and rapidly in response to shifts in supply and demand.

Aggregate Supply Curve

A graphical representation depicting the total supply of goods and services that firms in an economy are willing to produce at various price levels.

Average Price Level

The average of current prices across the entire spectrum of goods and services produced in the economy.

Final Goods

Final goods are products that have completed the manufacturing process and are purchased for consumption by the end consumer rather than for resale or further processing.