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TL Company has expected earnings of $75 in one year if it does well and $25 if it does poorly. The firm has outstanding debt
TL Company has expected earnings of $75 in one year if it does well and $25 if it does poorly. The firm has outstanding debt of $50 that is due in 1 year. However, given the financial distress costs, the debtholders will receive only $40 in 1 year if the firm does well and $15 if it does poorly. There is a 60% chance the firm will do well and a 40% chance that it will do poorly. What is the current value of the debt if the interest rate on bonds is 8%?
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