A firm raised $100 million from investors: $50 million of bonds, and $50 million of...
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A firm raised $100 million from investors: $50 million of bonds, and $50 million of equity. The $50 million bond financing was raised by selling a one-year bond with a par value of $60 million (which is the promised payment to bondholders). The $100 million was spent on purchasing assets today. One year later, with 50% chance, the assets value will be $180 million, and with 50% chance that it will be $40 million. Ignore all other costs and expenses. No cash flow will be generated. Regardless of what happens, the firm will be liquidated and bond investors and equity investors will be paid using the liquidation value. There are no other stakeholders. What is the expected return of equity investors?
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