ABC issues $4,000,000 perpetual debt that pays 12% annual coupon. The yield of the debt is 12% now. At the end of year 1, the yield may be 15% (60% probability) or 8% (40% probability).

a) What is market value of the debt?

b) If the debt is callable at 108% of par at the end of year 1, what is its market value?

c) Assume that the yield changes to 8% at the end of year 1, ABC replaces the debt with a new debt. The flotation cost is $50,000. The new debt will be parked in the money market to earns 4% interest over the 30-day overlap period. ABCs tax rate is 30%. What is the NPV of the debt refund?