Altona Inc. will introduce a new product to the market. Depending on how the product will do in the market, Altona estimates that the firm will have a value of either $90 million, $160 million, or $190 million next year, with equal probability for each of the three outcomes. Assume that the cash flows are unrelated to the state of the economy (i.e. risk from the project is diversifiable) so that the project has a beta of 0 and a cost of capital equal to the risk-free rate, which is currently 7%. Assume perfect capital markets.

Suppose that if Altona defaults, the value of firms assets will go down by 25% due to bankruptcy costs and suppose that Altona has zero-coupon debt with a $120 million face value that is due next year.

The total value of Altona today with leverage and the present value of its financial distress costs are closest to

	$80 million and $2.5 million
	$121 million and $4.7 million
	$130 million and $7.0 million
	$145 million and $11.2 million
	None of the above