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Assume that the firm has assets worth A=$100, and that alpha=30%, r=8%, and the firm makes no payouts prior to the maturity date of the
Assume that the firm has assets worth A=$100, and that alpha=30%, r=8%, and the firm makes no payouts prior to the maturity date of the debt. There is a single debt issue with a maturity value of $120. Compute the yield on this debt assuming that it matures in 1 year, 2 years, 5 years, or 10 years. What debt-to-equity ratio do you observe in each case?
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