The Sawmill plans on closing its doors after one more year.During its last year in business the firm expects to generate a cash flow of $74,000 if the economy booms and $57,000 if it does not.The probability of a boom is 15 percent.The firm has debt of $60,000 that is due in one year.That debt has a market value of $58,000 today.Ignore taxes.The current promised return on debt is ____ percent and the expected return on debt is ______ percent.
A)3.78;-1.16
B)3.45;-.95
C)2.02;3.78
D)3.45;2.67
E)2.67;3.45

Question

Quizplus · Accepted Answer

Promised return = ($60,000 - 58,000)/$58,000 = .0345,or 3.45%Expected return = [(.15 × $60,000 + .85 × $57,000)- $58,000]/$58,000 = -.0095,or -.95%

The Sawmill Plans on Closing Its Doors After One More