Good Time Company is a regional chain department store. It will remain in busine

Question

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 $200 million in a boom year and $91 million in a recession. The company's required debt payment at the end of the year is $125 million. The market value of the company’s outstanding debt is $98 million. The company pays no taxes. a. What payoff do bondholders expect to receive in the event of a recession?

Explanation / Answer

Expected payoff to debtholder = 60% × $200 + 40% × $91

= $120 + $36.4

= $166.4 million

Expected payoff next year if company Liquidate is $156.40 million.

a

Required debt payment = $125 million

Market Value of debt = $980 million

Expected cash flow during recession is $91 million.

Debtholder is first person who recieve fund after liquidation.SO bond holder will recieve total Cash flow during recession that is $91 million.

So Total payoff to bondholder during recession is $91 million.

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