An office building will be worth $13 million in 2 years if the economy booms (probability of 80%) and $5 million otherwise. The appropriate annualized cost of capital for such a building is 12%.

The office building costs $7 million to build today and can be financed with equity or a bank loan. Assume risk neutrality.

A)What is the present value of the office building (in $ million)?

B)What is the annualized promised rate of return for the loan?

C)What is the expected value of the levered equity in 2 years (in $ million)?