Cliff Corp (CC) is a relatively risky firm that will have assets worth next year either...

Cliff Corp (CC) is a relatively risky firm that will have assets worth next year either $100 million, $120 million or $330 million with equal probability. Given the risk, the required rate of return on firm assets is 18%. CC also has two outstanding bonds: senior bonds with a face value $95 million cost of debt of 4% and junior debt with a face value of $30 million and a cost of debt of 12%. If CC defaults on either bond there will be an additional loss of asset value of $10 million in bankruptcy costs. What is the current value of the senior debt, junior deb and equity? What is the expected return on the levered equity? What are the promised returns (YTM) on the senior and junior debt?

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jeff jeffy answered 1 year ago

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