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The assets of a firm are worth $100m, and has a volatility of 20%
The assets of a firm are worth $100m, and has a volatility of 20%. The firm is an all equity firm. It is considering altering its capital structure by issuing a 2 year zero coupon bond with face value $60m, and a 2 year zero coupon subordinated debt issue with face value $20m. The riskless yield is 8% continuously compounded.
Use backward recursion to establish the value at each node of both the senior debt and the junior debt.
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