Markman Incorporated (MI) is ready to launch a new product. Depending upon the success of this product, MI will have a value of either $80 million, $130 million, or $200 million, with each outcome being equally likely. The cash flows are unrelated to the state of the economy (i.e. risk from the project is diversifiable) so that the project has a beta of 0 and a cost of capital equal to the risk-free rate, which is currently 5%. Asuume that in the event of default, 20% of the value of MIs asset will be lost in bankruptcy costs and suppose that MI has zero-coupon debt with a $130million face value due next year. Assume that the capital markets are perfect except for financial distress costs. Also, assume bankruptcy costs are NOT incurred if the debts claims are exactly equal to the value of the firm.

1) What is the initial value of MIs Debt?

2) What is the present value of MIs Financial distress costs( difference between firms values with and without bankruptcy cost)