The TrunkLine Company Will Earn £60 in One Year If

question 31

Multiple Choice

The TrunkLine Company will earn £60 in one year if it does well.The debtholders are promised payments of £35 in one year if the firm does well.If the firm does poorly, expected earnings in one
Year 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

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Definitions:

Title

Title refers to the legal right to own or use property, evidenced by a document showing ownership such as a deed.

Buyer

A person or entity that purchases goods or services from another.

Agreement

A mutual understanding or arrangement, typically formalized by a contract, between two or more parties regarding their rights and obligations.

Warranty Of Title

A guarantee provided by a seller to a buyer that they legally own the item being sold and have the right to sell it, free from any claims by others.