A firm has 65% probability of being worth $100 million and a 35% probability of being...

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A firm has 65% probability of being worth $100 million and a 35% probability of being...

A firm has 65% probability of being worth $100 million and a 35% probability of being worth $130 million. There is one bond outstanding that promises to pay $100 million at an interest rate of 7%. The cost of capital for the firmʹs projects is 9%. What is the promised return on the bond?

a)7.0%

b) Not determinable

c) 10.8%

d) 6.4%

business finance

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Answer 1

Answer #1

a: 7%

The promised return on the bond is the Interest rate on the bond. This is fixed at 7%.

Hence 7% is the promised return on the bond which is fixed in advance.

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Answer 2

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