TL Company has outstanding debt of $50 that is due in one year. However, given the financial distress costs, the debtholders will only receive $40 if the firm does well and $15 if it does poorly. The probability the firm will do well is 60 percent with the 40 percent probability assigned to poor conditions. What is the current value of the debt if the discount rate is 8 percent?

A. $27.78
B. $30.00
C. $26.67
D. $27.50
E. $28.40

$27.78( A )

Explanation:

initial debt owed = $50

value of debt when the company does well = $40

value of debt when the company is at poor conditions = $15

probability of poor conditions= 40% = 0.4

probability of doing well = 60% = 0.6

The current value of the debt is =  (probability of poor conditions * value at poor conditions) +(probability of firm doing well*value when is doing well)

= ( 0.4 * $15 ) + ( 0.6 * $40 )

= $6 + $ 24 = $30  

to get the actual value we will divide the calculated value by the discounted value ( 1 + r )^n = (1 + 0.08)^1

hence the actual cost = 30 / ( 1.08 ) ^1 = $27.78

there was no passage listed but using the process of elimination i'd say it was d. the high economy would do the opposite. i don't see how low prices would affect it. high unemployment is possible but i feel d is the better answer.

answer; (a) searching for information can be done quickly;