DIY Inc. has expected earnings of $57 in one year if it does well and $30 if
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Question:
DIY Inc. has expected earnings of $57 in one year if it does well and $30 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 $41 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 DIY's cost of debt is 9.3 percent?
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