A broker wants to sell a customer an investment costing $100 with an expected payoff in one year of $106. The customer indicates that a 6 percent return is not very attractive. The broker responds by suggesting the customer borrow $90 for one year at 4 percent interest to help pay for the investment.

a. What is the customer’s expected return if she borrows the money?

b. Does borrowing the money make the investment more attractive?

c. What does the irrelevance proposition say about whether borrowing the money makes the investment more attractive?

 LO.1