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?

Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
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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?
-10%
-100%
-60%
-20%
Transcribed Image Text: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? -10% -100% -60% -20%
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