Compute bankruptcy costs

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There are no corpomte taxes in this question. F's operating value2 of assets in one year can be high ($5 million) or low ($2 million) with equal probability. F has debt, face value $3 million, maturity one year, coupon 5%, risk )83 = 0.1. Market value B of F's debt is $2.3 million, risk-free rate is 3%, expected return of the market portfolio is 8%. F goes bankrupt only if the market value of its assets is lower than the claim of debtholders.3 Compute bankruptcy costs (i.e. percentage of asset's operating value lost in liquidation).

Reference no: EM133075778

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