Cool Refreshments has bonds outstanding with a face value of $140,000 that are selling at par.It also has 15,000 shares of stock outstanding that are selling for $19.80 a share.The all-equity value of the firm is $395,000.The tax rate is 34 percent.What is the value of the financial distress costs? Assume there are no other claims on the firm.
A)$5,600
B)$4,800
C)$6,200
D)$5,100
E)$6,500

Question

Quizplus · Accepted Answer

V_L = $395,000 + .34 × $140,000 = $442,600Current firm market value = $140,000 + 15,000 × $19.80 = $437,000Expected bankruptcy costs = $442,600 - 437,000 = $5,600

Cool Refreshments Has Bonds Outstanding with a Face Value of $140,000