Compute the expected percentage gain

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Reference no: EM132789629

Suppose a company has the chance to make an investment that will result in a profit of 10 billion if it is successful but the company will be worthless and go bankrupt if the investment if unsuccessful. The firm has bonds that pay an 8% annual interest rate and have a value of 1,000 per bond and stock that sells gor 10 per share. If the new product say, a cure for corona virus is successful the price of the stock will jump to 2,000 per share, but the value of the bonds will remain just 1,000 per bond. The probability of success is 50% and the probability of failure of 50%.

1. How much is the expected stock price is?

2. Compute the expected percentage gain on the stock using the current price of stocks.

Show your solution please.

Reference no: EM132789629

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