You are considering buying the bonds of a very risky company. A bond with a $$100$ face value, a $1-$year

maturity, and a coupon rate of $22\%$ is selling for $$95.$ You consider the probability that the company will

survive to pay off the bond by $80\%.$ With $20\%$ probability, you think that the company will default, in

which case you think that you will be able to recover $$40.$

$1.$ What is the expected return on bond?

$2.$ If the company has cost of equity rE$=25\%,$ tax rate Tc$=35\%,$ and $40\%$ of its capital structure is

equity, what is the weighted average cost of capital?