Question

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?

Answer 1

In case of recession the company might go bankrupt so it will incur legal and other fees of $30 , so the company will make a provision of $30

Therefore, in recession the bondholders will be paid = $54 - $30 = $24