The Wiz Co.owes $60 to its bondholders for the payment of principal and interest.The company expects to have a cash flow of $136 if the economy continues as it is but that cash flow will decrease to $54 if the economy enters a recession.Should the company ever face the real possibility of bankruptcy,it will incur legal and other fees of $30.What amount will the bondholders be paid in the case of a recession?
A)$30
B)$60
C)$54
D)$24
E)$0

Question

Quizplus · Accepted Answer

If the company enters a recession, it will have a cash flow of $54. After paying the $30 legal and other fees, the remaining cash flow is $24. Therefore, the bondholders will only receive $24, which is less than the $60 that they are owed. So, the bondholders will not be paid in full and will experience a loss. Thus, option D is correct.