Good Time Company is a regional chain department store. It will remain in business for one more year. The probability of a boom year is 80 percent and the probability of a recession is 20 percent. It is projected that the company will generate a total cash flow of $204 million in a boom year and $95 million in a recession. The company's required debt payment at the end of the year is $129 million. The market value of the company’s outstanding debt is $102 million. The company pays no taxes.

a. What payoff do bondholders expect to receive in the event of a recession?

b. What is the promised return on the company's debt?

c. What is the expected return on the company's debt?

a. $95 million

b. 26.5%

c. 78.6%

Explanation:

a. It is projected that the company will generate a total cash flow of $95 million in a recession.  The bondholders expect to receive a payoff of $95 million.

b. The promised return is the company's required debt payment at the end of the year ($129 million) and the t ($102 million).

Promised return =

Promised return =

Promised return = 0.2647 ≈ 0.265

The promised return on the company's debt is 0.265 or 26.5%

c. The expected return is the company's expected debt value and the current market value of the company’s outstanding debt ($102 million). We will need to find the company's expected value of debt since it is unknown.

expected debt value = expected debt value = (80% ×$204 million ) + ( 20% × $95 million)

expected debt value = (0.8 ×$204 million ) + ( 0.2 × $95 million)

expected debt value = ($163.2 million ) + ($19 million)

expected debt value = $182.2 million

We can now determine the expected return.

The expected return =  

expected return =

Expected return = 0.7863 ≈ 78.6%

The expected return on the company's debt is 78.6%

if you use only 25 for your entertainment and only 200 for the groceries that you really need and take out the 50 per month for the computer then that should be enough