Suppose that USB Corp has

$100m invested in 8% risk

-

free bonds that mature in one

-

year.

The company also has $80m in debt outstanding that will also mature in a year. USB

shareholders are considering selling the $100m in debt and investing in a project that has a

60% chance of retu

rning $200m and a 40% chance of returning $2m.

Required:

What will the equity value of USB be in one

-

year without shareholders taking on the

project?

a.

$100m

b.

$80m

c.

$20m

d.

$8m