Jessica needs 800$ to start a project with the following potential returns in one year: 1400$ in case of strong economy; 900$ in case of weak economy, 50% probability for strong, 50% probability for weak. Jessica considers two mutually exclusive financing offers: Solution A: Baker offers to be the only and 100% owner shareholder (only equity, no debt); Solution B: Elizabeth and Delville have joined forces; their offer is equity plus debt: Elisabeth will be the shareholder and Delville will lend the money, actually he will lend 500$ at risk free interest rate, which is 5%. Equity will represent 50% of the total enterprise value and debt 50%.

The risk premium, in other words the rate of return (excluding the risk free rate) required by Baker in order to compensate for the uncertainty of the returns, is 10%,

2. What is the total rate of return required by Baker? A) 15% B) 10% C) 25% D) 50% E) None of these answers