Rackin Pinion Corporation’s assets are currently worth \($900.\) In one year, they will be worth either \($600\) or \($1,200.\) The riskfree interest rate is 5 percent. Suppose Rackin Pinion has an outstanding debt issue with a face value of \($600\) .

a. What is the value of the equity?

b. What is the value of the debt? The interest rate on the debt?

c. Would the value of the equity go up or down if the risk-free rate were 20 percent? Why? What does your answer illustrate?