Question
The Winning Co. is in financial trouble and it is expected that it will file for bankruptcy protection today. You hold a $1,000 face value
The Winning Co. is in financial trouble and it is expected that it will file for bankruptcy protection today. You hold a $1,000 face value bond of the company paying annual coupons and maturing in 10 years. After the bankruptcy filing the firm will stop paying interest and bondholders expect to receive $.25 for every $1.00 of face value in two years, one share of the reorganized company with an expected price of $50. It is also expected that at the resolution of bankruptcy in 3 years,the bondholders will receive another $0.15 for every dollar of face value. You also know that bonds with similar risk are selling at YTM of 15%. What should be the price of the bonds? Assume the cost of equity for the reorganized company to be 15%.
Please show the calculations. Thank you in advance :)
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