Question
Good Time Company is a regional chain department store. It will remain in business for one more year. The probability of a boom year is
Good Time Company is a regional chain department store. It will remain in business for one more year. The probability of a boom year is 60 percent and the probability of a recession is 40 percent. It is projected that the company will generate a total cash flow of $188 million in a boom year and $79 million in a recession. The company's required debt payment at the end of the year is $113 million. The market value of the companys outstanding debt is $86 million. The company pays no taxes. |
a. | What payoff do bondholders expect to receive in the event of a recession? (Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to the nearest whole number, e.g., 1,234,567.) |
b. | What is the promised return on the company's debt? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) |
c. | What is the expected return on the company's debt? |
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