You expect your ?rm to be worth $50, $100, or $120 with prob-abilities 1/10, 6/10 and 3/10, respectively.You can raise $75 in debt proceeds todayif you promise an interest rate of 10%. Under this ?nancing plan, your cost of equitycapital is 20%.

1. What is the cost of capital of this debt?

2. What is the value of your equity? What is the value of your ?rm?

3. If you raise $50 in debt proceeds today, your friendly investment-banker tells you that you can get away promising an interest rate of 3%. What is your debtcost of capital in this case?