Suppose that with the $85,000 of debt and no costs to financial distress the firm has a value of $178,150. Suppose, in addition:

 

1) The debt issue raises the possibility of bankruptcy.

2) The firm has a 10% chance of going bankrupt after 4 years.

3) If it goes bankrupt, it will incur bankruptcy costs of 50,000.

4) The discount rate is 15%.

 

What is the value of the firm?

Answer rating: 100% (QA)

To calculate the value of the firm we need to consider the present value of cash flows under differe... View the full answer