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Suppose a firm takes out a 3-year loan with a face value of $1,000,000. The current one-year risk-free rate is 4.00%. You estimate that the

Suppose a firm takes out a 3-year loan with a face value of $1,000,000. The current one-year risk-free rate is 4.00%. You estimate that the variance of the rate of change of the firms assets (the asset volatility) is 25.00% (note: when I say asset volatility, I mean sigma, not sigma squared). After the loan, the leverage ratio is 1.

a.) What is the value of the loan? (in dollars)

b.) What percent interest rate will the bank charge for this loan?

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