Cool Refreshments has bonds outstanding with a face value of $211,000 that are selling at par.It also has 14,000 shares of stock outstanding that are selling for $16.20 a share.The all-equity value of the firm is $408,000.The tax rate is 35 percent.What is the value of the financial distress costs? Assume there are no other claims on the firm.
A)$44,050
B)$46,800
C)$46,220
D)$45,100
E)$46,550

Question

Quizplus · Accepted Answer

The value of the financial distress costs is the difference between the all-equity value of the firm and the market value of the debt and equity. In this case, the all-equity value of the firm is $408,000, the market value of the debt is $211,000, and the market value of the equity is $14,000 x $16.20 = $226,800. Therefore, the value of the financial distress costs is $408,000 - $211,000 - $226,800 = $44,050.

Cool Refreshments Has Bonds Outstanding with a Face Value of $211,000