Otasha Inc has zero coupon debt with a face value of €120 million due in 10 years time, and no other debt outstanding. The current risk-free rate is 2.5%, but due to default risk the yield to maturity of Otasha's debt is 8%. Holders of Otasha's debt believe that in the event of default, 25% of the losses are attributable to distress costs. The debtholders' estimate of the present value of these distress costs is closest to: A) €6.4 million B) €23.4 million C) €13.9 million D) €9.5 million
Otasha Inc has zero coupon debt with a face value of €120 million due in 10 years time, and no other debt outstanding. The current risk-free rate is 2.5%, but due to default risk the yield to maturity of Otasha's debt is 8%. Holders of Otasha's debt believe that in the event of default, 25% of the losses are attributable to distress costs. The debtholders' estimate of the present value of these distress costs is closest to: A) €6.4 million B) €23.4 million C) €13.9 million D) €9.5 million
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:Otasha Inc has zero coupon debt with a face value of €120 million due in 10 years time,
and no other debt outstanding. The current risk-free rate is 2.5%, but due to default risk
the yield to maturity of Otasha's debt is 8%. Holders of Otasha's debt believe that in the
event of default, 25% of the losses are attributable to distress costs. The debtholders'
estimate of the present value of these distress costs is closest to:
A) €6.4 million
B) €23.4 million
C) €13.9 million
D) €9.5 million
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