P1318 Capital structure tradeoff benefits and costs TK Implements is an unusual company that will operate for one year, generate cash flow just once, and then shut down. The value of TK Implements today is $4,075,600, a figure which includes both the value of the firms equity and the value of its debt. TK equity has a 23.5% expected return. Including principal and interest, TK Implements will have $1,610,000 worth of debt due at the end of the year. There are no taxes, and the companys possible net operating profits for next year are: $2.76 million (25% probability), $6.44 million (45% probability), and $4.14 million (30% probability).

1. Find the expected return on TKs debt? Hint: find the equity value first and subtract that from total firm value.
2. Will bankruptcy costs affect TKs value?
3. If TK were unlevered, what would its expected return on equity be?