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Good Time Company is a regional chain department store. It will remain in business for one more year. The probability of a boom year is 60 percent and the probability of a recession is 40 percent. It is projected that the company will generate a total cash flow of $203 million in a boom year and $94 million in a recession. The company's required debt payment at the end of the year is $128 million. The market value of the company's outstanding debt is $101 million. The company pays no taxes.
a. What payoff do bondholders expect to receive in the event of a recession? (Do not round intermediate calculations. Enter your answer in dollars, not millions of dollars (e.g. 1,234,567).)
b. What is the promised return on the company's debt? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places (e.g., 32.16).)
c. What is the expected return on the company's debt? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places (e.g., 32.16).)
Suppose your firm can borrow what it needs from a local bank at 5% interest. If your firm's effective tax rate is 30%, what is its after-tax cost of debt?
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