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Corporate Finance · Quiz 2 · 16 Mar 2025 · January 2025 term

Question 18: What is the expected payoff for the equity owner in the …

Question 18

+4 marksOne correct option

You purchase a farm located near a river for 500 thousand units. You believe that there is a 4% 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 240 thousand units in the next year; otherwise, the farm generates a payoff of 600 thousand units in the next year. The appropriate cost of capital is 20% per year. Suppose you finance your purchase with a loan of 400 thousand units and the remaining amount as equity.
Based on the above data, answer the given subquestions.

What is the expected payoff for the equity owner in the next year?

  1. A

    105.6 thousand

  2. B

    250 thousand

  3. C

    100.75 thousand

  4. D

    40 thousand

Show answer

Correct answer

  • A

    105.6 thousand

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Question 18 of 25 in the IIT Madras BS Corporate Finance (Corporate Finance) Quiz 2 paper sat on 16 Mar 2025, in the January 2025 term (IIT M DEGREE AN EXAM QDB2 16 Mar 2025). It carries 4 marks.

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