Question

Globe Services plans on closing its doors after one more year. During its last year in business, the firm expects to generate a cash flow of $67,000 if the economy booms and $44,000 if it does not. The probability of a boom is 30 percent. The firm has debt of $53,400 that is due in one year. That debt has a market value of $45,800 today. Ignore taxes. The current promised return on debt is __________ percent, and the expected return on debt is __________ percent.

Answer 1

Answer and Explanation:

The computation is shown below:

Current promised return on debt is

= $53,400 ÷ $45,800 - 1

= 16.60%

And, the expected return on debt is

The expected amount would be

= $53,400 × 30% + $44,000 × 70%

= $16,020 + $30,800

= $46,820

 Now the expected return on debt is

= $46,820 ÷ $45,800 - 1

= 2.23%