Question: A firm will be worth (next year) either $50, $100, or $150, with probabilities 1/3, 1/3, and 1/3, respectively. Assume that this type of firm has an overall average cost of capital of 33.33%. It expects to pay only an interest rate of 15% for a 1-year bond that raises $65 today.
(a) What is the promised payment on the bond?
(b) What is the expected rate of return on the equity if the firm is financed with this bond and its equity market-beta is 6?