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Empress Inc. has issued a bond with a face value of $1,000 and an interest rate...

Empress Inc. has issued a bond with a face value of $1,000 and an interest rate of 9% to fund a new project. The bond is secured by the cash flows from the project, which will be $950 with a probability of 50% and $1,200 otherwise. Assume risk neutrality.

What is the appropriate cost of capital for the project?

Solutions

Expert Solution

Calculation of CF from the project
1075 -----> 50%*950 + 50%*1200
Cost of capital =
Return on CF / Investment
(1075-1000)/1000
7.50%

jeff jeffy answered 2 years ago
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