______ 2. Assume a firm would like to borrow $900 from a bank for one year...
______ 2. Assume a firm would like to borrow $900 from a bank for one year to invest in a project with the following possible cash flows at time 1:
|
Probability |
40% chance |
60% chance |
|
Project cash flows |
$375 |
$2000 |
The firm has no “assets-in-place,” and therefore will only be able to use the cash flows from the project (given above) to make payment on the loan. What interest rate will the bank need to charge on this one-year loan to earn an expected return of 7%?
|
A. 36.28% B. 39.44% C. 41.10% D. 43.15% |
E. 46.85% F. 48.23% G. 50.56% H. 52.17% |
Homework Answers
900*1.07=40%*375+60%*x
=>x=(900*1.07-40%*375)/60%
=>x=$1,355.00
Interest rate the bank need to
charge=1355/900-1=50.556%
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2. Assume a firm would like to borrow
$900 from a bank for one year...
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