Cool Refreshments Has Bonds Outstanding with a Face Value of $140,000

question 25

Multiple Choice

Cool Refreshments has bonds outstanding with a face value of $140,000 that are selling at par.It also has 15,000 shares of stock outstanding that are selling for $19.80 a share.The all-equity value of the firm is $395,000.The tax rate is 34 percent.What is the value of the financial distress costs? Assume there are no other claims on the firm.

• A)$5,600
• B)$4,800
• C)$6,200
• D)$5,100
• E)$6,500

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Definitions:

Intra-entity Purchases

Transactions involving the exchange of goods or services between entities within the same parent company, often leading to consolidation adjustments.

Gross Profit Rate

The ratio of gross profit to net sales, indicating the efficiency of a company in controlling its production or purchase costs.

Equity Method

An accounting technique used by firms to assess the profits earned by their investments in other companies.

Intra-entity Gross Profit

The profit recognized on transactions conducted within the same entity, not realized in consolidated financial statements until the transactions affect an external party.