Question 1: Good Time Company is a regional chain department store. It will remain in business...

Question 1: 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 60 per cent and a recession is 40 per cent. It is projected that Good Time will generate a total cash flow of Rs 250 million in a boom year and Rs100 million in a recession. The firm’s required debt payment at the end of the year is Rs 150 million. The market value of Good Time’s outstanding debt is Rs108.93 million. Assume a one-period model, risk neutrality, and annual discount rate of 12 per cent for both the firm’s debt ratio and equity. Good Time pays no taxes.

A) What is the value of the firm’s equity?

B) What is the promised return on Good Time’s debt?

C) What is the value of the firm?

D) How much would Good Time’s debt be worth if there were no bankruptcy costs?

E) What payoff, after bankruptcy costs, do bondholders expect to receive in the event of a recession?

F) What costs do bondholders expect Good Time to incur should bankruptcy arise at the end of the year?

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