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Question: A firm can be worth $100 million (with 20% probability), $200 million (with 60% probability), or $300 million (with 20% probability). the firms projects require an appropriate cost of capital of 8%. The firm has one senior bond outstanding, promising to pay $80 million. It also has one junior 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%. What is the firms cost of capital for its junior bond? What is the firms cost of capital for its levered equity?

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Category:- Basic Finance
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