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To replicate the value of the assets of the firm, we first need to invest the present value of $55 in the risk-free asset. This costs $55/1.10 = $50. If the assets turn out to be worth $160, then the option is worth $160 - 100 = $60. Our risk-free asset will be worth $55, so we need ($160 - 55)/60 = 1.75 call options. Because the firm is currently worth $110, we have:

The equity is thus worth $34.29; the debt is worth $110 on the debt is about ($100/75.71) - 1 = 32.1%.

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