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Financial Distress Good Times Company bondholders

See attachment for sample calculations.

(1). Provide full documentation of the process used to reach solutions.
(2). Provide a brief response that highlights how the financial market can impact capital decisions and how debt or equity financing can impact shareholder wealth.

Financial Distress Good Times Company is a regional chain store. It will remain in business for one more year. The probability of a recession is 40 percent. It is projected that the company will generate a total cash flow of $210 million in a boom year and $85 million in a recession. The company required debt payment at the end of the year is $120 million. The market value of the company's outstanding debt is $94 million. The company pays no taxes.

a. What payoff do bondholders expect to receive in the event of a recession?
b. What is the promised return on the company's debt?
c. What is the expected return on the company's debt?

Dividends and Firm Value. The net income of Novis Corporation is $45,000. The company has 20,000 outstanding shares and a 100 percent payout policy. The expected value of the firm one year from now is $1,635,000. The appropriate discount rate for Novis is 12 percent, and the dividend tax rate is zero.

a. What is the current value of the firm assuming the current dividend has not yet been paid?
b. What is the ex-dividend price of Novis's stock if the board follows the current policy?
c. At the dividend declaration meeting, several board members claimed that the dividend is too meager and probably depressing Novis's price. They proposed that Novis sell enough new shares to finance a $4.60 dividend.
i. Comment on the claim that the low dividend is depressing the stock price. Support your argument with calculations.
ii. If the proposal is adopted, at what price will the new shares sell? How many will be sold?

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Solution Summary

The financial distress for goods time company is examined.