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2. Consider a firm that has debt that matures in a year. The face value of debt is $950. There are no coupon payments. The

2. Consider a firm that has debt that matures in a year. The face value of debt is $950. There are no coupon payments. The current market value of assets is $850. In one year, when the debt matures, the value of the assets will be either $700 or $1,200. The risk-free rate is 12%. Find the value of equity.

Correct Answer: $112.50

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