Question
Suppose you have a company, which, starting next year, will either generate $200 every year forever, or $100 every year forever (with equal probability). Assume
Suppose you have a company, which, starting next year, will either generate $200 every year forever, or $100 every year forever (with equal probability). Assume no systemic risk, risk free rate is 10%. All uncertainty will be resolved at date 1. Suppose now this company issues perpetual debt with a face value of $1500 and 10% coupon. This means that the company promises to pay $150 in interest per year. If it fails to pay the debt service, the bond holders seize the company. Assume no taxes. Suppose the one-time bankruptcy fee is $11. This means if the company fails to pay the $150, it will pay a one time fee of $11. What is the total value of the company?
$2500
$1515
$1495
$250
$1445
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