TL Company Has Expected Earnings of $75 in One Year

question 32

Multiple Choice

TL Company has expected earnings of $75 in one year if it does well and $25 if it does poorly. The firm has outstanding debt of $50 that is due in one year. However, given the financial distress costs, the debtholders will only receive $40 in one year if the firm does well and $15 if it does poorly. There is a 60 percent chance the firm will do well and a 40 percent chance that it will do poorly. What is the current value of the debt if the interest rate on bonds is 8 percent?

• A) $27.78
• B) $27.50
• C) $30.00
• D) $26.67
• E) $28.40

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Definitions:

Glossopharyngeal Neuralgia

A condition characterized by recurrent episodes of severe pain in the 9th cranial nerve area.

Bilateral CTS

Carpal Tunnel Syndrome affecting both hands, characterized by numbness, tingling, and pain due to median nerve compression.

Spinal Nerves

Nerves that originate from the spinal cord, carrying motor, sensory, and autonomic signals between the spinal cord and the body.

Cerebral Infarction

A type of stroke that occurs when blood flow to part of the brain is blocked, leading to the death of brain tissue.