Payoff Mid States Company is a regional chain department store. It will remain in business for one more year

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$