Use the following information for questions
Consider a firm with $100 retained earnings.It has risky debt outstanding which requires a payment of $100 one period hence.The firm has a risky project which requires an investment of $50 today.If the project is undertaken, the shareholders get a liquidating dividend of $50 today.The state of nature one period hence is either High H or Low L with equal probability.If no investment is made today, the firm has a total value of $120 in state H or $80 in state L.If the investment is made, the firm's total value is $250 in state H or $10 in state L.Assume a discount rate of zero.
-What is the expected payoff to the bondholders if the project is ndertaken?
A)$85
B)$55
C)$30
D)-$30
E)-$55

Question

Use the following information for questions 
Consider a firm with $100 retained earnings.It has risky debt outstanding which requires a payment of $100 one period hence.The firm has a risky project which requires an investment of $50 today.If the project is undertaken, the shareholders get a liquidating dividend of $50 today.The state of nature one period hence is either High H or Low L with equal probability.If no investment is made today, the firm has a total value of $120 in state H or $80 in state L.If the investment is made, the firm's total value is $250 in state H or $10 in state L.Assume a discount rate of zero.
-What is the expected payoff to the bondholders if the project is ndertaken?
A)$85
B)$55
C)$30
D)-$30
E)-$55

Quizplus · Accepted Answer

If the project is undertaken, the bondholders receive $100 in state H and $10 in state L. The expected payoff is (0.5 * $100) + (0.5 * $10) = $55.

Use the Following Information for Questions