Good Time plc is a regional chain department store. It will remain in business for one more year. The probability of a boom year is 60 per cent and the probability of a recession is 40 per cent. It is projected that the company will generate a total cash flow of £250 million in a boom year and £100 million in a recession. The company’s required debt payment at the end of the year is £150 million. The market value of the company’s outstanding debt is £108.93 million. The company pays no taxes. Assume a discount rate of 12 per cent.

(a) What pay-off do bondholders expect to receive in the event of a recession?

(b) What is the promised return on the company’s debt?

(c) What is the expected return on the company’s debt?