You just paid $800,000 to become the sole equity investor in an unlevered firm. If things go well, you will sell the firm to Google for $1,600,000 in one year. If things go poorly, you will sell the firm to Facebook for $600,000 in one year. It is equally likely that things will go well versus poorly. What is your expected return on this investment?

(only answer question below)

Assume its an alternate reality, and you just paid $400,000 to become the sole equity investor in the same firm described in the prior question, except the firm has a debt-to-value ratio of 50%. The interest rate on the firms debt is 10%, and the firm plans to retire the debt in one year (i.e. pay it in full). At that point, you will sell your equity to Google/Facebook depending on whether things went well or poorly. Assume its an M&M world (no taxes, frictions, etc.). What is your expected return on this investment?

a. 50.2%

b. 65.0%

c. 38.0%

d. 55.7%