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20. AI Robotics Company will earn $120 in one year if it does well. The debtholders are promised payments of $80 in one year if
20. AI Robotics Company will earn $120 in one year if it does well. The debtholders are promised payments of $80 in one year if the firm does well. If the firm does poorly, expected earnings in one year will be $20 and the repayment to debtholders will only be $10 because of financial distress cost. The probability of the firm performing well is 60%. If bondholders are fully aware of these costs, what will the debtholders pay for the debt? The interest rate on the bonds is 7%.
A. $35.51
B. $38.00
C. $48.59
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