GoingDown Corporation (GDC)will remain in business for one more year. The estimated probability of a boom year is 60%, status quo is 10% , and the recession is 30%. It is projected that GDC will have total cash flow of $1000 million in a boom year, $800 million in status quo, and $400 million in recession. Its required debt payment is $700 million at the year end. Assume risk neutrality and the required rate of return of 8% per year for both the stock and the bond.

a. What is the total value of the firm? What is the value of the equity?

b. If the total market value of the bond outstanding of GDC is $550 million, what is the expected bankruptcy cost in case of a recession?

c. Continuing with part b, what is the total value of the firm now?

d. What is the promised return on the bond? What is the probability?