Pine Cove, Inc. has expected earnings of $100 in one year if it does well and $20 if it does poorly. The firm has outstanding debt of $60 that is due in one year. However, given the financial distress costs, the debtholders will only receive $50 in one year if the firm does well and $10 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 7%?

Answer rating: 100% (QA)

Pine Cove has a 60 chance of doing well earning 100 It ... View the full answer