Testir Corp. has outstanding 'zero coupon' debt of $600 million, so $600 million is due at the end of year 1. Testir begins a risky corporate strategy. Management estimates with a 60% probability, that the comp any's total will be worth $800 million at the end of year 1. A 40% probability is that the company will be worth $500 million. If bankruptcy occurs, the distress costs will be 1596 of the total asset value. Testir' s cost of capital is 8%.  

What is the present value of the company's $600 million in debt? 

What is the present value of the equity?

Answer rating: 100% (QA)

To calculate the present value of the debt and equity we first need to determine the expected ... View the full answer