Katie D's has total assets valued at $3,160.These assets are expected to be worth either $2,900 or $3,300 by next year.One year from now,the company must repay a $3,100 pure discount bond.The risk-free rate is 4.2 percent.What is the current value of the firm's debt?

Question

Quizplus · Accepted Answer

The value of the firm's debt is equal to the present value of the bond which needs to be repaid in one year. Using the formula 
PV = FV / (1 + r)^n
where PV is the present value, FV is the future value, r is the risk-free rate, and n is the number of periods, we get:
PV = 3,100 / (1 + 0.042)^1
PV = $2,971.55
Therefore, the current value of the firm's debt is $2,971.55, which corresponds to choice B.

Katie D's Has Total Assets Valued at $3,160