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One year from now, a firm can be worth $100 with probability 75% or worth $30 with probability 25%. This firm is financed today with

One year from now, a firm can be worth $100 with probability 75% or worth $30 with probability 25%. This firm is financed today with a bond worth $40 which will pay back interest and principal one year from now. This bond has an expected interest rate of 12%, and the firm’s overall (expected) cost of capital is 20%. What are the capital structure weights of debt and levered equity?


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