ABC Corporation is an all equity firm with a current market value of $50, and will be worth

$25 or $75 in one year. The risk-free interest rate is 10%. Suppose ABC Corp. issues zero-
coupon, one-year debt with a face value of $55 million, and uses the proceeds to pay a special

dividend to shareholders. Assume perfect capital markets and use the binomial model to answer
the following:
a. What is the present value of the newly issued debt?
b. Use Modigliani-Miller to find the value of ABC’s equity just after the dividend is paid
(the ex-dividend share price)?