2) There are three equally likely scenarios for the value of a corporation after one year: $50, $150, or $400.

The firm has debt with face value $100 maturing in one year (i.e., the firm promised to pay $100). Based on its current market value, the expected rate of return on the firms debt (rD) is 5% per year. The riskiness of the firms underlying assets is such that its expect rate of return (rU) is 10% per year. Assume ModiglianiMiller conditions hold.

a. What is the firms expected rate of return on equity (rE)?

b. What is the debts promised yieldtomaturity?