Buckeye Industries has a bond issue with a face value of $1,000 that is coming due in one year. The value of Buckeye's assets is currently $1,200. Jim Tressell, the CEO, believes that the assets in the firm will be worth either $600 or $1,700 in a year. The going rate on one-year T-bills is 6 percent. What is the current value of the firm's debt?

Question

Quizplus · Accepted Answer

$1,200 = [($1,700 - $600)/($1,700 - $1,000)] E₀ + [$600/(1 + 0.06)] = $403.43D₀ = $1,200 - $403.43 = $796.57

Buckeye Industries Has a Bond Issue with a Face Value