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Houston homes has outstanding debt of $78 that is due in one year. given the financial distress costs, debtholders will receive only $62 if the firm does well and $24 if it does poorly. the probability that the firm will do well is 75 percent and the probability that it will do poorly is 25 percent. assuming a discount rate of 9.6 percent, what is the current value of the debt?

Answer :

The current value of the debt based on the probability given about Houston homes is $47.90.

How to calculate the current value of debt?

From the information given, the expected payment to debt holders will be:

= ($62 × 75%) + ($24 × 25%)

= $46.50 + $6

= $52.50

The current value of the debt will be:

= 52.50 / (1 + 9.6%)

= 52.50/1.096

= $47.90

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