Good Time Company is the regional chain department store. It will stay in business for one more year. Probability of boom year is 60 percent and recession is 40 percent. It is projected that Good Time will create total cash flow of $250 million in boom year and $100 million in recession. Firm's required debt payment at end of year is $150 million. Market value of Good Time's outstanding debt is $108.93 million. Suppose one-period model, risk neutrality and annual discount rate of 12 percent for both firm's debt and equity. Good Time pays no taxes.
A. Determine the value of the firm's equity?
B. Compute the promised return on Good Time's debt?
C. Determine the value of the firm?
D. How much would Good Time's debt be valuable if there was no bankruptcy costs?
E. What payoff, after bankruptcy costs, do bondholders expect to get in the event of recession?
F. What cost do bondholders expect Good Time to acquire must bankruptcy arise at end of the year?