Dusty Donuts Has Zero Coupon Debt with a Face Value

Multiple Choice

Dusty Donuts has zero coupon debt with a face value of $10 million due in 3 years,and no other debt outstanding.The risk-free rate is 4%,but due to default risk the yield to maturity on the debt is 10%.Dusty's believes that in the event of default,10% of the losses are attributable to bankruptcy and distress costs.Estimate the present value of the distress costs.

A) $138 million
B) $138 thousand
C) $1.38 million
D) $1.38 thousand