Otasha Inc has zero coupon debt with a face value of €120 million due in 10 years time, and no other debt outstanding. The current risk-free rate is 2.5%, but due to default risk the yield to maturity of Otasha's debt is 8%. Holders of Otasha's debt believe that in the event of default, 25% of the losses are attributable to distress costs. The debtholders' estimate of the present value of these distress costs is closest to: A) €6.4 million B) €23.4 million C) €13.9 million D) €9.5 million

Otasha Inc has zero coupon debt with a face value of €120 million due in 10 years time, and no other debt outstanding. The current risk-free rate is 2.5%, but due to default risk the yield to maturity of Otasha's debt is 8%. Holders of Otasha's debt believe that in the event of default, 25% of the losses are attributable to distress costs. The debtholders' estimate of the present value of these distress costs is closest to: A) €6.4 million B) €23.4 million C) €13.9 million D) €9.5 million

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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