Vijay Good Time Company is a regional chain department store. It will remain in business forone more year. The probability of a boom year is 70 percent and the probability of arecession is 30 percent. It is projected that the company will generate a total cash flowof $187 million in a boom year and $78 million in a recession. The company's requireddebt payment at the end of the year is $112 million. The market value of the company'soutstanding debt is $85 million. The company pays no taxes.a. What payoff do bondholders expect to receive in the event of a recession? (Do notround intermediate calculations and enter your answer in dollars, not millions ofdollars, rounded to the nearest whole number, e.g., 1,234,567.)b. What is the promised return on the company's debt? (Do not round intermediatecalculations and enter your answer as a percent rounded to 2 decimal places, e.g.,32.16.)c. What is the expected return on the company's debt? (Do not round intermediatecalculations and enter your answer as a percent rounded to 2 decimal places, e.g.,32.16.)a. Payoffb. Promised return%c. Expected return%

Part A)Since, the tota amount due on debt at the end of the year is $112 million and the company can…

Answered: Good Time Company is a regional chain…

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter9: Capital Budgeting And Cash Flow Analysis

Section: Chapter Questions

Problem 20P

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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 70 percent and the probability of a recession is 30 percent. It is projected that the company will generate a total cash flow of $202 million in a boom year and $93 million in a recession. The company's required debt payment at the end of the year is $127 million. The market value of the company's outstanding debt is $100 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 and enter your answer in dollars, not millions of dollars, rounded to the nearest whole number, e.g., 1,234,567.) b. What is the promised return on the company's debt? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) c. What is the expected return on the company's debt? (Do not round intermediate calculations and…
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