The Sawmill expects to generate a cash flow of $59,000 next year if the economy booms and $46,000 if it does not.The probability of a boom is 20 percent.The firm has debt of $52,000 that is due in 1 year and has a current market value of $48,700.The firm plans to close after this coming year.The current promised pretax return on debt is ________ percent,and the expected pretax return on debt is ________ percent.
A)6)78;1.16
B)6)78;-3.08
C)5)49;1.16
D)5)49;-2.67
E)6)27;-3.08

Question

Quizplus · Accepted Answer

Promised return = ($52,000 - $48,700)/ $48,700 = 0.0678,or 6.78%
Expected return = {[0.20($52,000)+ (1 - 0.20)($46,000)] - $48,700} / $48,700 = -0.0308,or -3.08%

The Sawmill Expects to Generate a Cash Flow of $59,000