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Consider a company that needs to make an investment of $10,000. This investment can be financed with any combination of stocks and/or bonds. Assume that
Consider a company that needs to make an investment of $10,000. This investment can be financed with any combination of stocks and/or bonds. Assume that the interest rate on bonds is 8%. Also assume that in good years the company earns $1,500 and in bad years the company earns $500. Good years and bad years occur with equal probability. (42 points total) (a) Use this information to fill in the following table which summarizes the effects of different financing options for this firm (12 points) Interest Paid to Bonds Equity Payment ($) Expected Expected Standard Bad Year Good Year Payment ($) Return(%) Deviation(%) Allocation StocksBonds 100% 0% 75% 25% 50% 50%
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