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Corporate Finance · Quiz 2 · 1 Dec 2024 · September 2024 term

Question 17: What would be the appropriate promised rate of return th…

Question 17

+1 markOne correct option

You purchase a farm located near a river for 100 thousand units. You believe that there is a 20% chance of flooding in the river in the next year. If there is a flood, the produce in the farm gets destroyed, and the total payoff is 40 thousand units in the next year; otherwise, the farm generates a payoff of 150 thousand units in the next year. The appropriate cost of capital is 20% per year. Suppose you finance your purchase with a loan of 80 thousand units and the remaining amount as equity.
Based on the above data, answer the given subquestions.

What would be the appropriate promised rate of return that the creditor of the loan would demand?

  1. A

    20%

  2. B

    27.5%

  3. C

    32.5%

  4. D

    37.5%

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Correct answer

  • D

    37.5%

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Question 17 of 25 in the IIT Madras BS Corporate Finance (Corporate Finance) Quiz 2 paper sat on 1 Dec 2024, in the September 2024 term (IIT M DEGREE AN EXAM QDB2 01 Dec 2024). It carries 1 mark.

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