Question: INCLUDE WRITTEN SOLUTION WestAce will generate a terminal cash ow of $370M or $110M in one year, each with equal likelihood. WestAces outstanding debt has

INCLUDE WRITTEN SOLUTION

WestAce will generate a terminal cash ow of $370M or $110M in one year, each with equal likelihood. WestAces outstanding debt has a correct market value today of $120M and is due in a year. The cost of debt (rD) is 15% and the unlevered cost of equity (rU) is 20%. The capital market is perfect (no taxes, distress costs, etc.)

What is the yield to maturity on the WestAce debt?

Question 6 options:

34.3%

36.3%

38.3%

40.3%

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