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RISKY BOND PROBLEM Face value of bond 100 Coupon rate 22% Non-default probability 80% Default probability 20% Payoff in default (% of face value) 40%

RISKY BOND PROBLEM
Face value of bond 100
Coupon rate 22%
Non-default probability 80%
Default probability 20%
Payoff in default (% of face value) 40%
Market price today 95
Expected payoff in one year 88
Expected return, rD 0.2842
Part b
Percentage equity 40%
Percentage debt 60%
Corporate tax rate, TC 35%
Cost of equity, rE 25%
WACC 21.08%

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