=+Part 2: Donahoe Company has a liability of $10,000 which is due in three years. The discount rate applicable to the firm is 10. Assume that the firm's credit standing is adversely affected by an untoward cco-

nomic event. As a result, the discount rate applicable to the firm goes up to 12%.

Required:

a. How does the value of the liability change?

b. If the firm's financial condition worsens, does it make sense for the value of the liabilities to decline? Explain.