You’re considering buying the bonds of a very risky company which is paying interest annually. A bond with a $100 face value, a 1-year maturity, and a coupon rate of 22% is selling for $95. You consider that the probability that the company will survive to pay off the bond is 80%. If the company defaults, you think that you will be able to recover $40. If the company has cost of equity of 25%, tax rate of 35%, and 40% of its capital structure is equity, what is its WACC?
