The TrunkLine Company Will Earn $60 in One Year If

question 13

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:

Variable Costs

Expenses that change in proportion to the activity or volume of business, such as materials and labor costs.

Fixed Costs

Rephrased: Expenses that remain constant regardless of the company's level of production or business activity.

Trucking Department

A specialized division within a company responsible for the management and operation of trucking logistics, including transportation and delivery services.

Peak-Period Requirements

The increased demand or resources needed during the busiest or most active times for a business or service.