1) A firm has 65% probability of being worth $100 million and a 35% probability of being worth $130 million. There is one bond outstanding that promises to pay $100 million at an interest rate of 7%. The cost of capital for the firms projects is 9%. What is the expected return on the levered equity?

a) 4.5%

b) 2.0%

c) 2.5%

d) 32.6%

2) Which of the following statements is false?

a) If management chooses to ignore the needs of bondholders when structuring a firm, the firm can be expected to have to pay a higher interest rate on its debt

b)In a perfect capital market, if a firms current capital structure is not optimal, one can expect that firm to be a takeover target

c)Management should focus only on the needs of a firms shareholders since they are the true owners of the firm and, as such, they elect the firms directors

d)If management does not consider the needs of the bondholders of a firm, they could end up destroying shareholder value