Miller Tool plans on closing its doors after one more year.During its last year in business,the firm expects to generate a cash flow of $76,000 if the economy booms and $58,000 if it does not.The probability of a boom is 15 percent.The firm has debt of $62,500 that is due in 1 year.That debt has a market value of $58,300 today.Ignore taxes.The current promised return on debt is ________ percent,and the expected return on debt is ________ percent.
A)7)20;8.13
B)8)18;1.03
C)8)18;9.12
D)7)20;0.64
E)8)36;1.98

Question

Quizplus · Accepted Answer

Promised return = ($62,500 - $58,300)/ $58,300 = 0.0720,or 7.20%
Expected return = {[0.15($62,500)+ (1 - 0.15)$58,000] - $58,300} / $58,300 = 0.0064,or .64%

Miller Tool Plans on Closing Its Doors After One More