A firm is expected to generate a single risky cash flow in one year. The CF will
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Question:
"A firm is expected to generate a single risky cash flow in one year. The CF will be either $90 (with probability 0.5) or $30 (with probability 0.5). All investors are risk neutral. The interest rate is 0. If the firm decides to borrow $50 and pay the amount as a dividend to shareholders, how much will be the promised return to creditors? Assume that, if bankruptcy happens, the firm will have to pay $5 to lawyers."
A. 50.0%
B. 21.4%
C. 33.3%
D. 75.0%
E. 66.0%
Related Book For
Basic Finance An Introduction to Financial Institutions Investments and Management
ISBN: 978-1111820633
10th edition
Authors: Herbert B. Mayo
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