Ask Question
2 February, 19:39

TL Company has expected earnings of $75 in one year if it does well and $25 if it does poorly. The firm has outstanding debt of $50 that is due in one year. However, given the financial distress costs, the debtholders will only receive $40 in one year if the firm does well and $15 if it does poorly. There is a 60 percent chance the firm will do well and a 40 percent chance that it will do poorly. What is the current value of the debt if the interest rate on bonds is 8 percent

+5
Answers (1)
  1. 2 February, 19:48
    0
    Answer:$27.78

    Explanation:

    Expected value of debt after one year = (40*.60) + (15*.40)

    = 24 + 6

    =$ 30

    Current value of debt = Value at 1year / (1+r) ^n

    = 30 / (1+.08) ^1

    = 30 / 1.08

    =$ 27.78
Know the Answer?
Not Sure About the Answer?
Find an answer to your question 👍 “TL Company has expected earnings of $75 in one year if it does well and $25 if it does poorly. The firm has outstanding debt of $50 that is ...” in 📗 Business if the answers seem to be not correct or there’s no answer. Try a smart search to find answers to similar questions.
Search for Other Answers