Cool Refreshments has bonds outstanding with a face value of $211,000 that are selling at par.It also has 14,000 shares of stock outstanding that are selling for $16.20 a share.The all-equity value of the firm is $408,000.The tax rate is 35 percent.What is the value of the financial distress costs? Assume there are no other claims on the firm.
A)$44,050
B)$46,800
C)$46,220
D)$45,100
E)$46,550

Question

Quizplus · Accepted Answer

V_L = $408,000 + 0.35($211,000)= $481,850 Current firm market value = $211,000 + 14,000($16.20)= $437,800 Expected bankruptcy costs = $481,850 - $437,800 = $44,050

Cool Refreshments Has Bonds Outstanding with a Face Value of $211,000