A firm consists of a single project. If the project is very successful, the firm will be
worth $800. If it is less successful, the firm will be worth only $360. There is a 60%
chance that the project will be very successful. The firm has a single, zero-coupon
bond with a face value of $500 and a required return of 8%. The cost of capital for the
overall firm is 12%. What is the cost of capital of the levered equity? What is the
promised rate of return on the debt?

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The Answer of A firm consists of a single project. If the project is very successful, the firm will be
worth $800. If it is less successful, the firm will be worth only $360. There is a 60%
chance that the project will be very successful. The firm has a single, zero-coupon
bond with a face value of $500 and a required return of 8%. The cost of capital for the
overall firm is 12%. What is the cost of capital of the levered equity? What is the
promised rate of return on the debt?

A Firm Consists of a Single Project