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FirmOne will have a value of either $150 million, $100 million, or $191 million in one year with an equal likelihood of each outcome. The
FirmOne will have a value of either $150 million, $100 million, or $191 million in one year with an equal likelihood of each outcome. The cash flows are unrelated to the state of the economy so that the firm has beta of zero and the debt and equity costs of capital equal the risk-free rate, which is 5%. Assume that the capital markets are perfect. Suppose that Kane has a (zero-coupon) debt payment of $125 million due in one year. What is the market value of Kanes debt?
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