TK Implements is an unusual company that will operate for one year, generate cash flow just once, and then shut down.

The value of TK Implements today is $4,075,600, a figure which includes both the value of the firm’s equity and the value of its debt. TK equity has a 23.5% expected return. Including principal and interest, TK Implements will have $1,610,000 worth of debt due at the end of the year. There are no taxes, and the company’s possible net operating profits for next year are: $2.76 million (25% probability), $6.44 million (45% probability), and $4.14 million (30% probability).

a. Find the expected return on TK’s debt? 

b. Will bankruptcy costs affect TK’s value?

c. If TK were unlevered, what would its expected return on equity be?