Suppose a company has the chance to make an investment that will result in a profit of 10 billion if it is successful but the company will be worthless and go bankrupt if the investment is unsuccessful. The firm has bonds that pay 8% annual interest rate and have a value of $1,000 per bond and stock that sells for $12 per share. If the new project is successful, the price of the stock will jump to $18, but the value of bonds will remain $1,000 per bond. The probability of successes is 40% and the probability of failure is 60%. What is the expected return on bond?

Suppose a company has the chance to make an investment that will result in a profit of 10 billion if it is successful but the company will be worthless and go bankrupt if the investment is unsuccessful. The firm has bonds that pay 8% annual interest rate and have a value of $1,000 per bond and stock that sells for $12 per share. If the new project is successful, the price of the stock will jump to $18, but the value of bonds will remain $1,000 per bond. The probability of successes is 40% and the probability of failure is 60%. What is the expected return on bond?

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter11: Capital Budgeting And Risk

Section: Chapter Questions

Problem 6P

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