Suppose company ABC will generate cash flows of either 1500 mln or 700 mln depending on whether the economy is strong or weak in one year. Both states of the economy are equally likely. After receiving the cash flow ABC will distribute it and liquidate. The current risk free rate is 6% and the cost of equity if the company is 100% equity financed is 15%.

1. What is the current value of ABC if it is all-equity financed?

2. What is the cost of debt if ABC borrows $500 mln?

3. What is the cost of equity if ABC borrows $500 mln?

4. What is the cost of debt if ABC borrows $ 700 mln? (Hint: first break total debt into riskless and equity-like parts; next, compute payoffs to debt in good and bad market conditions; next, to calculate return on debt compare expected payoff to initial value of debt)