The stockholder will receive whatever is left after bondholders are paid. An investor is thinking of investing $40,000 in the company for 1 year. A year later, she will pull out of the investment. She can put the money in any combination of bonds and stock. The possible payoffs of the project (in thousands of dollars) are recorded here.

The investor can choose to put all of her $40,000 in either bonds or stock. What is the expected value for each of these two options at the end of the year? What is the standard deviation of these two options?

Use the following information to answer question. A new company is formed to invest in a new project. This company is going to raise the needed capital, $100,000, by issuing $50,000 bonds and $50,000 stock. The bondholder is guaranteed a 10 % interest rate regardless of the performance of the company.

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Earnings before interest Interest Earnings after interest Value of all stocks Probability Recession S 5 5 0 50 .4 Stable economy S 10 5 5 55 .3 Boom S3 20 5 15 65 .3