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emmasim [6.3K]
3 years ago
6

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 80 percent and the probability of a recession is 20 percent. It is projected that the company will generate a total cash flow of $204 million in a boom year and $95 million in a recession. The company's required debt payment at the end of the year is $129 million. The market value of the company’s outstanding debt is $102 million. The company pays no taxes.
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?
Business
1 answer:
ella [17]3 years ago
4 0

Answer:

a. $95 million

b. 26.5%

c. 78.6%

Explanation:

a. It is projected that the company will generate a total cash flow of $95 million in a recession.  The bondholders expect to receive a payoff of $95 million.

b. The promised return is the company's required debt payment at the end of the year ($129 million) and the (\frac{expected debt value}{market value of the company’s outstanding deb}) - 1t ($102 million).

Promised return = (\frac{company's required debt payment at the end of the year}{market value of the company’s outstanding debt}) - 1

Promised return = (\frac{129 million}{102 million}) - 1

Promised return = 0.2647 ≈ 0.265

The promised return on the company's debt is 0.265 or 26.5%

c. The expected return is the company's expected debt value and the current market value of the company’s outstanding debt ($102 million). We will need to find the company's expected value of debt since it is unknown.

expected debt value = (Probability of a boom year* cash flow of boom year) + (probability of a recession year * cash flow of recession year)expected debt value = (80% ×$204 million ) + ( 20% × $95 million)

expected debt value = (0.8 ×$204 million ) + ( 0.2 × $95 million)

expected debt value = ($163.2 million ) + ($19 million)

expected debt value = $182.2 million

We can now determine the expected return.

The expected return =  (\frac{expected debt value}{market value of the company’s outstanding debt}) - 1

expected return = (\frac{182.2 million}{102 million}) - 1

Expected return = 0.7863 ≈ 78.6%

The expected return on the company's debt is 78.6%

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A free market economy supports which market structure by establishing antitrust
motikmotik

Answer:

monopolistic competition

Explanation:

A monopolistic competition is a type of market structure where many suppliers exist, as well as many buyers. What distinguishes it from perfect competition is that the goods and services are heterogeneous, therefore, suppliers are not price takers. Barriers to entry are also low.

8 0
3 years ago
West Corp. issued 10-year bonds two years ago at a coupon rate of 8.1 percent. The bonds make semiannual payments. If these bond
REY [17]

Answer:

Yield To Maturity is 7.82% per year and 3.9% per 6 months

Explanation:

Assuming Coupon value is $100

C = Coupon Payment = 100 x 8.1%/ = $8.1

F = Face Value = $100

P = Price = $102

n = number of years = 10

Yield To Maturity = ( C + ( F - P )/n ) / ( ( F + P ) / 2 )

Yield To Maturity = ( $8.1 + ( $100 - $102 )/10 ) / ( ( $100 + 102 ) / 2 )

Yield To Maturity = $7.9 / $101

Yield To Maturity = 7.82%

8 0
4 years ago
When projecting the balance sheet, what happens when the initial balance sheet yields estimated total assets greater than the su
Furkat [3]

Answer:

The correct answer is E

Explanation:

Assets is the one, which is any kind of resourced owned by the business and could be used in future for the benefit of the business. So, in this case, the balance sheet, states that the estimated total assets are more than the total equity and the liabilities, which represent that the company or the business is in good state that the liabilities of the company are paid off and the equity is also balanced, the company is still in good situations as have the total assets.

3 0
3 years ago
A company reports the following: Net income $375,000 Preferred dividends 75,000 Average stockholders' equity 2,500,000 Average c
Anit [1.1K]

Answer:

a) The return on stockholders’ equity = 15%

b)  The return on common stockholders’ equity = 16%

Explanation:

a) Return on Stockholders’ Equity = (Net income)/(Average stockholders' equity)

= ($375,000)/$2,500,000

= 15%

b) Return on Common Stockholders’ Equity = (Net income - Preferred dividends) /(Average return on common stockholders' equity)

= ($375,000 - $75,000) / $1,875,000

= 16%

7 0
3 years ago
The total assets and the total liabilities of a business at the beginning and at the end of the year appear below. During the ye
Serjik [45]

Answer:

Net Income = $45000

Explanation:

The basic accounting equation states that the value of assets is always equal to the sum of the values of liabilities and equity.

Total Assets = Total Liabilities + Total equity

At the beginning of the year:

295000 = 190000 + Total equity

Total Equity = 295000 - 190000

Total Equity = $105000

The net income earned during the year is appropriated in two ways. It is either retained in the business and transferred to retained earning or paid out as dividends or both. Transfer to retained earnings from net income increases equity.

At the end of the year:

355000 = 220000 + Total Equity

Total Equity = 355000 - 220000

Total Equity = $135000

Ending balance of equity = Opening balance of Equity + issuance of equity(Common stock) + Net Income - Dividends

135000 = 105000 + 35000 + Net Income - 50000

135000 = 90000 + Net Income

Net Income = 135000 - 90000

Net Income = $45000

6 0
3 years ago
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