Bright Future Corporation $($BFC$)$ is ready to launch a new product. Depending upon the success of this product, BFC will have a value of either $$100$ million, $$150$ million, or $$191$ million, with each outcome being equally likely. The cash flows are unrelated to the state of the economy $($i$.$e$.$ risk from the project is diversifiable$)$ so that the project has a beta of $0$ and a cost of capital equal to the risk$-$free rate, which is currently $5\%.$ Assume that the capital markets are perfect. Assume that in the event of default, $20\%$ of the value of BFC$\text{'}$s assets will be lost in bankruptcy costs and suppose that BFC has zero$-$coupon debt with a $$125$ million face value due next year.

The initial value of BFC$$s equity is closest to:

Question $2$Answer

A$.$

$29$ million

B$.$

$35$ million

C$.$

$0$

D$.$

$10$ million