Question
Need an answer ASAP------35 The TrunkLine Company will earn $60 in one year if it does well. The debtholders are promised payments of $35 in
Need an answer ASAP------35
The TrunkLine Company will earn $60 in one year if it does well. The debtholders are promised payments of $35 in one year if the firm does well. If the firm does poorly, expected earnings in one year will be $30 and the repayment will be $20 because of the dead weight cost of bankruptcy. The probability of the firm performing poorly or well is 50%. If bondholders are fully aware of these costs what will they pay for the debt? The interest rate on the bonds is 10%.
Select one:
a. $25.00
b. $27.50
c. $29.55
d. $32.50
e. $35.00
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