In one year: Firm XYZ will earn $90 if its businesses perform well. The Firm owes a $60 payment to its creditors in one year. If the Firm's businesses perform poorly next year, then its earnings will only be $60. In this case, its payment to the creditors will be $45 because of the direct costs of bankruptcy. The chance that the Firm's businesses will perform well or poorly in one year equals 50%. The interest rate on the Firm's debt is 3%. The creditors are fully aware of these possible future outcomes. How should they evaluate this debt? To answer this question, first, the math shows that the creditors expect to receive _________ from the Firm next year. Then, one can calculate that the current value of debt equals _________.
In one year:
Firm XYZ will earn $90 if its businesses perform well. The Firm owes a $60 payment to its creditors in one year.
If the Firm's businesses perform poorly next year, then its earnings will only be $60. In this case, its payment to the creditors will be $45 because of the direct costs of bankruptcy.
The chance that the Firm's businesses will perform well or poorly in one year equals 50%. The interest rate on the Firm's debt is 3%.
The creditors are fully aware of these possible future outcomes. How should they evaluate this debt? To answer this question, first, the math shows that the creditors expect to receive _________ from the Firm next year. Then, one can calculate that the current value of debt equals _________.
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