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Question
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 stockholders 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. Given the payoffs of the project, what does the percent chance of success need to be in order for the expected value of equity with the project to be equal to the expected value of equity without the project?A) 1/3
B) 1/4
C) 1/5
D) 1/6
Answer
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Related questions
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The claim lenders' hold on cash flows in a company with outstanding risky debt is often thought of as:
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Q:
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Q:
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Q:
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A) True
B) False
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A) True
B) False
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Consider a call option on a stock with a strike price of $60. If the stock price at expiration is $50, the payoff from the call option is $10.
A) True
B) False