Loveland Enterprises Will Earn $70 in One Year If It

Multiple Choice

Loveland Enterprises will earn $70 in one year if it does well.The debtholders are promised payments of $40 in one year if the firm does well.If the firm does poorly,expected earnings in one year will be $35 and the repayment will be $25 because of the dead weight cost of bankruptcy.The probability of the firm performing poorly or well is 50%.If bondholders are fully aware of these costs what will they pay for the debt? The interest rate on the bonds is 9%.

A) $23.50
B) $25.00
C) $27.50
D) $29.82
E) $35.00