A firm can be worth $100 million (with 20% probability), $200 million (with 60% probability), or $300 million (with 20% probability). The firm's project require an appropriate cost of capital of 8%. the firm has one senior bond outstanding, promising to pay $80 million. the senior bond promises an interest rate of 5%. the junior bond promises an interest rate of 25%
1. What is the firms cost of capital for its junior bond?
A. 6.25% B. 6.67% C. 8.00% D. 25.00%
2. what is the firm's cost of capital for its levered equity?
A. 13.26% B.15.57% C. 19.83% D. 33.35%
3. if the firm's senior bond promised to pay $81 million instead of $80 million, with all other information remaining the same, its cost of capital for senior bond would?
A. Increase B. Decrease C. Remain unchanged D. Possibly increase and possible decrease