Question
A coffee shop has $500 in debt. And the current value of the coffee shops assets is $600. The shops analysts have proposed two plans,
A coffee shop has $500 in debt. And the current value of the coffee shops assets is $600. The shops analysts have proposed two plans, A and B, in order to maximize the value of equity growth over the next year. Under strategy A, the shops assets will remain at $600 with a probability of p, and decline to $500 with a probability of (1-p). Under strategy B, the shops assets will increase to $6000 with a probability of (1-p) and $0 with a probability of p. If you believe that p is equal to 0.62, and the discount factor is 10%, what is the interest rate on the firms debt today?
A. | 10% |
B. | Not enough information |
C. | 900% |
D. | 0% |
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