A department store will remain in business for one more year. The probability of a boom year is 70 percent and the probability of a recession is 30 percent. It is projected that the company will generate a total cash flow of $187 million in a boom year and $78 million in a recession. The company's required debt payment at the end of the year is $112 million. The market value of the company's outstanding debt is $85 million. The company pays no taxes.
 
a. What payoff 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?

Answer rating: 100% (QA)

a In the event of a recession the bondholders will receive the promised debt payment of 112 mill... View the full answer