I already know the answer to \"b\" is 30.68%. Need help with \'a\' and \'c\' Goo

Question

I already know the answer to "b" is 30.68%. Need help with 'a' and 'c'

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 $190 million in a boom year and $81 million in a recession. The company's required debt payment at the end of the year is $115 million. The market value of the company’s outstanding debt is $88 million. The company pays no taxes.

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).)

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).)

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).)

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).)

Explanation / Answer

Expected payoff to debtholder = 60% × $190 + 40% × $81

= $114 + $32.4

= $146.4 million

Expected payoff next year is $146.40 million.

a

Expected cash flow during recession is $81 million.

Debtholder is first person who recieve fund after liquidation.SO bond holder will recieve total Cash flow during recession that is $81 million.

So Total payoff to bondholder during recession is $81 million.

b.

Required payment to bond holder = $115 million

Market value of bond = $88 million

Promised return on bond = ($115 / $88) – 1

                                         = 1.3068 – 1

                                         = 30.68%

Promised return to bond holder is 30.68%

c.

Expected cash flow next year = 60% × $115 + 40% × $81

                                                = $69 + $32.4

                                                = $101.4 million

Expected cash flow next year is $101.40 million.

Expected payoff to bondholder = $1011.40 million.

Market value of bond = $88 million

Expected return on bond = ($101.40 / $88) – 1

                                         = 1.15227 – 1

                                         = 15.23%

Expected return to bond holder is 15.23%

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