What if Ls debt is risky? For the purpose of this example, assume the value of Ls

Question:

What if L’s debt is risky? For the purpose of this example, assume the value of L’s operations is $4 million-which is the value of its debt plus equity. Assume also its debt Consists of 1-year zero bonds with a of $2 million. Finally, assume that L’s volatility is 0.60 (σ = 0.60) and that the risk-free rate is 6%.
David Lyons, CEO of Lyons Solar Technologies, is concerned about his firm’s level of debt financing. The company uses short-term debt to finance its temporary working capital needs, but it does not use any permanent (long-term) debt. Other solar technology companies average about 30% debt, and Mr. Lyons wonders why they use so much more debt and how it affects stock prices. To gain some insights into the matter, he poses the following questions to you, his recently hired assistant:

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A coupon or coupon payment is the annual interest rate paid on a bond, expressed as a percentage of the face value and paid from issue date until maturity. Coupons are usually referred to in terms of the coupon rate (the sum of coupons paid in a... Face Value
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