[SIZE=3]XYZ Inc. is financed by equity and a zero-coupon bond with a face value of $300, maturing in one year. The yield spread on the bond is 910 basis points, its beta is zero, and the risk-free rate is 2%. One year from now, XYZ’s assets will be worth $570 with 85% probability, and $170 with 15% probability. What is the market’s estimate of bankruptcy costs for XYZ?
[/SIZE]
