Firm XYZ will earn 90 if its businesses perform well The Firm owes a 60 payment to
Question:
Firm XYZ will earn 90 if its businesses perform well The Firm owes a 60 payment to its creditors in one year If the Firms businesses perform poorly next year then its earnings will only be 60 In this case its payment to the creditors will be 45 because of the direct costs of bankruptcy The chance that the Firms businesses will perform well or poorly in one year equals 50 The interest rate on the Firms debt is 3 The creditors are fully aware of these possible future outcomes How should they evaluate this debt To answer this question first the math shows that the creditors expect to receive _________ from the Firm next year Then one can calculate that the current value of debt equals _________.
Finance Applications and Theory
ISBN: 978-0077861681
3rd edition
Authors: Marcia Cornett, Troy Adair