When a company obtains an affiliated company’s debt instruments from a third party, how is the gain or loss on extinguishment of the debt calculated? When should this balance be recognized?

(a) In a troubled-debt situation, why might the creditor grant concessions to the debtor? (b) What type of concessions might a creditor grant the debtor in a troubled-debt situation?

Write a numerical expression for each phrase. Then simplify and answer the question. You are $2 in debt. You borrow$4 more. What is the total amount of your debt?

A company incurs debt at a rate of $D^{\prime}(t)=90(t+6) \sqrt{t^{2}+12 t}$ dollars per year, where t is the amount of time (in years) since the company began. By the fourth year the company had accumulated $16.260 in debt. a. Find the total debt function. b. How many years must pass before the total debt exceeds$40.000?

A corporation owed a $40,000 debt. Its creditor agreed to let the corporation pay the debt in five equal annual payments at 6.5% interest. Compute the annual payments.

A seventh-grade student does not believe that $-_5 < -_2$. The student argues that a debt of $5 is greater than a debt of$2. How do you respond?

Zevon Industries has a zero coupon bond issue that matures in two years with a face value of $35,000. The current value of the company’s assets is$21,800, and the standard deviation of the return on assets is 60% per year.

a. Suppose the risk-free rate is 5% per year, compounded continuously. What is the value of a riskfree bond with the same face value and maturity as the company’s bond?
b. What price would the bondholders have to pay for a put option on the firm’s assets with a strike price equal to the face value of the debt?
c. Using the answers from (a) and (b), what is the value of the firm’s debt? What is the continuously compounded yield on the company’s debt?
d. From an examination of the value of the assets of the company, and the fact that the debt must be repaid in two years, it seems likely that the company will default on its debt. Management has approached bondholders and proposed a plan whereby the company would repay the same face value of debt, but the repayment would not occur for five years. What is the value of the debt under the proposed plan? What is the new continuously compounded yield on the debt? Explain why this occurs.

How can the cost of debt be computed?

Based on the information below for Benson Corporation, what is the optimal capital structure?

a. Debt = 50%; Equity = 50%; EPS = $3.05; Stock price =$28.90
b. Debt = 60%; Equity = 40%; EPS = $3.18; Stock price =$31.20
c. Debt = 80%; Equity = 20%; EPS = $3.42; Stock price =$30.40
d. Debt = 70%; Equity = 30%; EPS = $3.31; Stock price =$30.00
e. Debt = 40%; Equity = 60%; EPS = $2.95; Stock price =$26.50

Assume that the federal debt increases at an annual rate of $1 \%$ per year. Use the compound interest formula (Unit $4 B$ ) to determine the size of the debt in $10$ years and in $50$ years. Assume that the current size of the debt (the principal for the compound interest formula) is $\$ 20$ trillion.

As a first step, we need to estimate what percentage of MMM’s capital comes from debt, preferred stock, and common equity. This information can be found on the firm’s latest annual balance sheet. (As of year-end 2016, MMM had no preferred stock.) Total debt includes all interest-bearing debt and is the sum of short-term debt and long-term debt.

a. Recall that the weights used in the WACC are based on the company’s target capital structure. If we assume that the company wants to maintain the same mix of capital that it currently has on its balance sheet, what weights should you use to estimate the WACC for MMM?

b. Find MMM’s market capitalization, which is the market value of its common equity. Using the sum of its short-term debt and long-term debt from the balance sheet (we assume that the market value of its debt equals its book value) and its market capitalization, recalculate the firm’s debt and common equity weights to be used in the WACC equation. These weights are approximations of market-value weights. Be sure not to include accruals in the debt calculation

before tax cost of debt formula

Explain how debt can be viewed as an option portfolio.

Why might someone choose to reaffirm a particular debt?