A firm has a single zero-coupon bond issue outstanding with a face value of $10 million. It matures in seven years. The current market value of the firms assets is $13 million. The volatility of the return on the firms assets is 50% per year. The risk-free rate is 6%, continuously compounded.

-What is the continuously compounded cost of debt (choose the closest one)?

A. 4.46

B. 8.54

C. 11.54%

D. 15.93%

- What is the debt value (choose the closest one)?

A. 4.46

B. 8.54

C. 11.54%

D. 15.93%

Suppose a firm has a single zero-coupon bond issue outstanding with a face value of $90,000 due in a year. The current market value of the firms asset is $100,000, and the risk-free rate is 10%. The firm is taking on a risky project, which will either increase the firm value in a year to $120,000 or decrease to $80,000.

- What is the yield on the debt (choose the closest value)?

A. 20.45

B. 79.55

C. 13.14%

D. 10%

- What is the value of equity (choose the closest value)?

A. 20.45

B. 79.55

C. 13.14%

D. 10%