Consider a company that is currently valued at $43 billion. Next year, the company will be worth either $50 billion (up state) or $40 billion (down state). The prevailing risk-free rate is 4%. The up-state price is $0.4538 and the down-state price is $0.5077.

Suppose that this company currently has debt outstanding with a $40 billion face value and a coupon rate of 5% per year. This debt comes due next year, and the company's CEO is currently deciding whether or not to make the next to last payment on this debt.

a) Suppose the company decides to make its current coupon payment. What will be the payout to the company's equityholders next year in the up state (units: billions of dollars)?

b) Suppose the company decides to make its current coupon payment. What will be the payout to the company's equityholders next year in the down state (units: billions of dollars)?

c) Suppose the company decides to make its current coupon payment. What is the present value of the payouts to the company's equityholders next year in both states (units: billions of dollars)?

d) It is optimal for the company to make its current debt payment.

True

False