Suppose I make the following assumptions:

$$FCF$$s are normally distributed

$$Average yearly FCF is $$400$ million

$$Annual standard dev. of FCF is $$120$ million

$$WACC for FCF is $10\%.$

$$Firm has $$2$ billion of debt bearing $6\%$ interest

$$Expected firm value loss on default is $20\%$

What is the dollar value of PV of the cost of distress? Assume that there is no discounting.

$[$Hint: if x is a random variable following the normal distribution, use Excel NORMDIST$($cutoff$,$ mean, standard deviation,$1)$ to obtain the probability that x is less or equal to the cutoff value.$]$

Suppose I make the following assumptions:

$$FCF$$s are normally distributed

$$Average yearly FCF is $$400$ million

$$Annual standard dev. of FCF is $$120$ million

$$WACC for FCF is $10\%.$

$$Firm has $$2$ billion of debt bearing $6\%$ interest

$$Expected firm value loss on default is $20\%$

What is the dollar value of PV of the cost of distress? Assume that there is no discounting.

$[$Hint: if x is a random variable following the normal distribution, use Excel NORMDIST$($cutoff$,$ mean, standard deviation,$1)$ to obtain the probability that x is less or equal to the cutoff value.$]$

$$40\mathrm{.}93$ million

$$4\mathrm{.}36$ million

$$7\mathrm{.}85$ million

$$39\mathrm{.}25$ million