Exercise 3. (7 points) Firm ABC has three classes of securities in its capital structure: equity, a 150M zero-coupon senior bond and a 150M zero-coupon subordinated bond. The firm's assets today are worth 350M and can go up each period by a factor of 1.25 or down by a factor of 0.8. The risk-free interest rate is 10% per year. Please use risk-neutral option pricing to answer the following questions. a. What is the value of ABC's senior bond? b. What is the value of ABC's junior bond? Explain the difference in pricing between the senior and the junior bond. c. What is the value of the equity? d. Two years later, unfortunately the bad state of nature (state down-down) has materialized and the firm is bankrupt. How much is each security holder (senior bondholders, junior bondholders and equity) entitled to receive from the firm's assets? e. The management of the company has proposed a reorganization plan to get out of bankruptcy (the down-down state). The plan states that, if the firm is reorganized, its assets will be worth one year from now 660M or 99M with equal probability (for simplicity assume this probability is a risk neutral probability). The management proposes a plan whereby creditors would render their existing claims and receive new claims, as follows: Senior creditors receive an debt security with face value of 99M plus 23.5% of the reorganized firm's equity; Junior creditors receive 29% of the reorganized firm's equity; Equity holders would receive 47.5% of the of the reorganized firm's equity. Please answer the following questions: e.1. Should senior bondholders accept the plan? e.2. Should junior bondholders accept the plan? If not, propose a plan that is acceptable to all creditors.