Computation of expected future return of the debt

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Reference no: EM1365302

ABC Company will earn $60 if it does well. The debtholders are promised payments of $35 if the firm does well. If the firm does poorly, expected earnings will be $30 and the repayment will be $20 because of the dead weight cost of bankruptcy. The probability of the firm performing poorly or well is 50%. If bondholders are fully aware of these costs, what will they pay for the debt? The interest rate on the bonds is 10%.

a. $25.00
b. $27.50
c. $29.55
d. $32.50
e. $35.00

Reference no: EM1365302

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