Custer's has bonds outstanding with a face value of $162,000 that are selling at par.It also has 10,000 shares of stock outstanding that are selling for $32.30 a share.The all-equity value of the firm is $455,000.The tax rate is 35 percent.By what amount has the value of the firm been decreased by the expected bankruptcy costs? Assume there are no other claims on the firm.
A)$11,300
B)$18,600
C)$26,700
D)$0
E)$30,000

Question

Quizplus · Accepted Answer

V_L = $455,000 + .35 × $162,000 = $511,700Current firm market value = $162,000 + 10,000 × $32.30 = $485,000Expected bankruptcy costs = $511,700 - 485,000 = $26,700

Custer's Has Bonds Outstanding with a Face Value of $162,000