1. Consider a firm with assets currently worth $400m. The assets worth could increase to $520m with probability 20% or decrease to $320m with probability 80% in one years time. The firm has a debt with face value of $380m maturing at that time. The risk-free rate is equal to 10% per year.

1. What are the firms debt and equity currently worth?

2. How would your answers to part i. change if the firm committed to pay a dividend equal to $20m shortly before the debt was maturing?