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MPM Company has expected earnings of $100 in one year if it does well and $40 if it does poorly. The firm has outstanding debt
MPM Company has expected earnings of $100 in one year if it does well and $40 if it does poorly. The firm has outstanding debt of $60 that is due in one year. However, given the financial distress costs, the debtholders will only receive $45 in one year if the firm does well and $25 if it does poorly. There is a 60 percent chance the firm will do well and a 40 percent chance that it will do poorly. What is the current value of the debt if the interest rate on bonds is 8 percent?
Select one:
a. $23.15
b. $55.56
c. $41.67
d. $37.00
e. $34.26
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