What is the promised return on the company debt


Problem:

Good time company is a regional chain department store. It will remain in business for one more year. The probability of a boom year is 60 percent and the probability of a recession is 40 percent. It is projected that the company will generate a total cash flow of 250MM in a boom year and 100MM in a recession. The company's required debt payment at the end of the year is 150MM. The MV of the company's outstanding debt is $108.93 MM. The company pays no taxes. Assume a discount rate of 12 percent.

A. What payoff do bondholders expect to receive in the event of a recession?

B. What is the promised return on the company's debt?

C. What is the expected return on the company's debt?

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Finance Basics: What is the promised return on the company debt
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