Payoff – Mid States 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 $188 million in a boom year and $79 million in a recession. The company’s required debt payment at the end of the year is $113 million. The market value of the company’s outstanding debt is $86 million. The company pays no taxes.**a.** What payoff do bondholders expect to receive in the event of a recession? **(Do not round intermediate calculations. Enter your answer in dollars, not millions of dollars, e.g. 1,234,567.)**

Payoff $ **b.** What is the promised return on the company’s debt? **(Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)**

Promised return %**c.** What is the expected return on the company’s debt? **(Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)**

Expected return %

Hornqvist, Inc., has debt outstanding with a face value of $4 million. The value of the firm if it were entirely financed by equity would be $18.45 million. The company also has 480,000 shares of stock outstanding that sell at a price of $32 per share. The corporate tax rate is 35 percent. What is the decrease in the value of the company due to expected bankruptcy costs? **(Do not round intermediate calculations. Enter your answer in dollars, not millions of dollars, e.g., 1,234,567.)**

Financial distress costs 490k

Related Question

**Answer:**

$800,000

**Explanation:**

we need to first calculate the value of Hornqvist with leverage:

value of the levered company = equity value + (debt’s face value x tax rate) = $18,700,000 + ($6,000,000 x 35%) = $20,800,000

now we calculate the market value of Hornqvist:

market value of the company = debt’s face value + (total outstanding shares x market price per share) = $6,000,000 + (350,000 x $40) = $20,000,000

finally to calculate the bankruptcy costs:

The company with the common equity accounts shown here has declared a stock dividend of 15 percent at a time when the market value of its stock is $37 per share.

Common stock ($1 par value) | $ | 435,000 | |

Capital surplus | 856,000 | ||

Retained earnings | 3,820,800 | ||

Total owners’ equity | $ | 5,111,800 | |

What would be the number of shares outstanding, after the distribution of the stock dividend? **(Do not round intermediate calculations.)**

New shares outstanding

What would the equity accounts be after the stock dividend? **(Do not round intermediate calculations.)**

Common stock | $ | |

Capital surplus | ||

Retained earnings | ||

Total owners’ equity | $ | |