Question

Problem 15-8 Financial Distress Mid States Company is a regional chain department store. It 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 $19 million in a boom year and $82 million in a recession. The company's required debt payment at the end of the year is market value of the company's outstanding debt is $89 million. The company pays no taxes $16 million. The a. What payoff do bondholders expect to receive in the event of a recession? (Do not round intermediate calculations. Enter your answer in dollars, not millions of dollars, e.g. 1,234,567) Payoff $ 82 b. What is the promised return on the company's debt? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) Promised return 30.330% c. What is the expected return on the company's debt? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) [18.870% Expected return Prev 40
Solve the wrong part

Answer 1

a.

Right amount to enter is > $82,000,000

In recession the cash flow generated would be lesser than Bond value which is required to be paid off.

Hence payoff for bond would not be more than $82,000,000

Note:

You have to enter amount in dollars.

Don’t enter “$82” it is in million enter in dollars