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