40)

ABC Company has $40 million face value outstanding of zero coupon bonds that mature in three years. The current market value of the firm's assets is $43 million, with a standard deviation of 35% per year. If the risk-free rate is 8% per year compounded continuously, (a) what is the market value of the firm's equity? (b) what is the market value of the firm's debt? (c) What is the firm's cost of debt? Is the debt risky?