What is the appropriate cost of capital for the project?

Empress Inc. has issued a bond with a face value of $1,000 and an interest rate of 13% to fund a new project. The bond is secured by the cash flows from the project, which will be $950 with a probability of 60% and $1,200 otherwise. Assume risk neutrality.

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Expert Solution

Expected cash flow of project = 950*60% + 1200*(1-60%)

= 1050

Cost of capital = (1050-1000)/1000 = 5%

Appropriate cost of capital is 5%

jeff jeffy answered 2 years ago

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