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Problem:

Brad's Robotics Incorporated will earn $60 in one year if it does well. The debtholders are promised payments of $40 in one year if the firm does well. If the firm does poorly, expected earnings in one year will be $10 and the repayment will be $5 because of the dead weight cost of bankruptcy. The probability of the firm performing poorly or well is 40%.

Required:

Question: If bondholders are fully aware of these costs what will they pay for the debt? The interest rate on the bonds is 7%.

  • $16.82
  • $19.73
  • $32.55
  • $38.75
  • $39.04

Note: Explain in detail and show all computations in proper way.

Accounting Basics, Accounting

  • Category:- Accounting Basics
  • Reference No.:- M91167650

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