Question: Empress Inc. has issued a bond with a face value of $1,000 and an interest rate of 9% to fund a new project. The bond

Empress Inc. has issued a bond with a face value of $1,000 and an interest rate of 9% to fund a new project. The bond is secured by the cash flows from the project, which will be $950 with a probability of 40% and $1,200 otherwise. Assume risk neutrality.

What is the appropriate cost of capital for the project?

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