A firm has a 30% chance of producing $115 in cash flows next year, and a 70% chance of producing $200 in cash flows. Assume risk neutrality and a cost of capital of 8%.
Your firm has debt with a face value of $100. Deadweight financial distress costs are $33. What is your firmʹs cost of debt capital?
a. 19.9%
b. 21.5%
c. 18.4%
d. 20.7%
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