In: Finance
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.
What is the appropriate cost of capital for the project?
Expected cash flow of project = 950*60% + 1200*(1-60%)
= 1050
Cost of capital = (1050-1000)/1000 = 5%
Appropriate cost of capital is 5%