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Suppose a company is financed entirely by financial debt and equity. This company wants to raise $65 funds today to undertake a risky project. The company will pay back the bondholders after a 1 period. The company’s investment banker tells them that they have to offer bond investors a 1 period interest rate of 16.92% if they want to raise $65. Determine the bondholders expected return under the following assumptions:

• If the economy expands in the future, an event with a probability of 75%, the firm value will be $100.

• If the economy contracts in the future, an event with a probability of 25%, the firm value will be $60.

Please show all work. Upvotes will be given for correct answer.

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