The probability of having a recession next year is 30%, and the probability of an expansio
The probability of having a recession next year is 30%, and the probability of an expansion is 70%. In a recession, the value of firm X will be 9; in an expansion, 17. The unlevered return to equity of a firm in the same industry is 18.26%. What is the value of firm X if it has no debt?
Now suppose that an investor in firm X offers the firm to trade $10 of equity in exchange for $10 of debt with promised yield of 30%. After the deal is done, the cost of equity rises to 51.67%. What is WACC?