Problem:
Brad's Robotics Incorporated will earn $60 in one year if it does well. The debtholders are promised payments of $40 in one year if the firm does well. If the firm does poorly, expected earnings in one year will be $10 and the repayment will be $5 because of the dead weight cost of bankruptcy. The probability of the firm performing poorly or well is 40%.
Required:
Question: If bondholders are fully aware of these costs what will they pay for the debt? The interest rate on the bonds is 7%.
- $16.82
- $19.73
- $32.55
- $38.75
- $39.04
Note: Explain in detail and show all computations in proper way.