Consider the following world. There are two time periods, t = 0 (today) when the decisions are made; and t = 1 the (uncertain) future. In the future, at t = 1, the world can be in one of the two states. The UP state (happens with probability 0.5) or the DOWN state (happens with probability 0.5). Assume that the interest rate is zero (i.e., no need to discount between t = 1 and t = 0).

1. Assets of the firm will equal $300 in the UP state (at time 1) or $100 in the DOWN state (at time t = 1). What is the present expected value of assets of the firm, PV(Assets) at time t = 0?

2. The firm has Debt, which needs to be paid at t = 1. The amount owed (face value of debt) equals $200.00. Debt must be paid in full (from Assets of the firm) before any assets are paid to Equity. How much will Debt receive in the UP state ( t = 1)? How much will Debt receive in the DOWN state (t = 1)? What is the present value of Debt, PV(Debt) at t = 0?

3. The firm has Equity, which receives all Assets after the Debt is paid at t = 1; if there are no Assets left, after the Debt has been paid, then Equity receives $0. How much will Equity receive in the UP state ( t = 1)? How much will Equity receive in the DOWN state (t = 1)? What is the Present Value of Equity, PV(Equity) at t = 0?