Based on economic conditions, the value of a firm next year will be either £90 million, £140 million, or £180 million with equal probability. The company has a zero-coupon debt with £110 million face value due next year. In the event of default, 20% of the company's value is lost due to costs of bankruptcy. Capital markets are perfect and the risk-free rate is 5%. a. What is the current value of debt and its yield to maturity? b. What is the current value of equity? And the total firm value? c. What is the present value of financial distress costs?

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Market Efficiency

Market efficiency refers to the market's ability to provide investors with all available information about investment options for buying and selling securities. Market efficiency reflects the true value of securities without undervaluing or overvaluing them. When the quality and quantity of information increase, the market becomes more efficient, allowing it to reduce arbitrage and obtain higher market returns from investment. In a well-functioning market, everyone receives all information completely and immediately at no cost. It opens up a plethora of opportunities for investors to access various investment options.