Miller Tool plans on closing its doors after one more year.During its last year in business the firm expects to generate a cash flow of $89,000 if the economy booms and $61,000 if it does not.The probability of a boom is 30 percent.The firm has debt of $65,000 that is due in one year.That debt has a market value of $57,000 today.Ignore taxes.The current promised return on debt is ____ percent and the expected return on debt is ______ percent.
A)9.12;14.04
B)11.18;14.04
C)11.18;9.12
D)14.04;9.12
E)14.04;11.18

Question

Quizplus · Accepted Answer

Promised return = ($65,000 - 57,000)/$57,000 = .1404,or 14.04%Expected return = [(.3 × $65,000 + .7 × $61,000)- $57,000]/$57,000 = .0912,or 9.12%

Miller Tool Plans on Closing Its Doors After One More