Blockchain Inc has debt with a promised payment of $400M in one year. This debt's market value
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Question:
Blockchain Inc has debt with a promised payment of $400M in one year. This debt's market value is $350M today and the cost of debt is 6%. Blockchain's (free) cash flows in a year are $720M with a probability 0.8 and $255M with probability 0.2. There will be no more cash flows. The cost of equity for the unlevered firm is 10% and the corporate tax rate is 40%. Corporate taxes is the only market imperfection.
Compute the debt's Yeild to Maturity (YTM) and explain why YTM > rD.
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