Company Q has a total value of $100 million, and next year its business could be worth either $120 million or $85 million. It currently has zero coupon debt with a face value of $90 million, due in one year. If the risk free rate is 5%, what is the value of the debt? What is the risk premium on the debt?

The solution is as follows...

Equity first: 100=35/30*E+85/1.05, so E=16.33

D=V-E=100-16.33=83.67

Required Return = 90/83.67 - 1 = 7.6%

Risk Premium = 7.6-5 = 2.6%.

However, I am wondering where 100=35/30*E+85/1.05 comes from? What formula is this?