The TrunkLine Company Will Earn $60 If It Does Well

question 52

Multiple Choice

The TrunkLine 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 the repayment will be $20 because of the dead weight cost of bankruptcy, expected earnings will be $30. 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) $32.50.
• B) $27.50.
• C) $25.00.
• D) $29.55.
• E) $35.00.

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