CoinBase will generate a cash flow of $220M or $80M if next year the economy is in boom or recession respectively. The probability of recession is 30% and of boom is 70%. The firm’s outstanding debt has a market value today of $100M and is due in a year. The cost of debt (rD) is 8% and the unlevered cost of equity (rU) is 10%. The capital market is perfect.
1. You know that CoinBase will default in the recession state next year. What is the face value (promised payment) of CoinBase’s debt?
(A) $ 127M
(B) $ 120M
(C) $ 112M
(D) $ 108M