NerdCorp is a producer of video games that has outstanding debt maturing next year. The debt has a face value of $285 thousand and an annual coupon with a coupon rate of 8.5%. The firm has just paid the coupon for the current year.

NerdCorp management is concerned about the firms prospects for the next year. A new competitor has entered the industry and appears to be taking some of their market share. In addition, they believe that the economy may be heading into recession. They have estimated their likely cash flow in three possible situations (or states of the world) as follows:

State	Probability	Cashflow($'000)
Average	0.2	460
Poor	0.6	320
Very poor	0.3	240

Assume that there are no taxes, and no explicit (accounting and legal) bankruptcy costs.

1. How much will NerdCorp owe to its bondholders in one year?

2. What would happen to the firm, and what would be the resulting values of debt and equity, next year in each of the possible states?

3. What are the expected values of the debt and equity next year? What are the standard deviations of those values across the three states?