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The Wiz Co. owes $60 to its bondholders for the payment of principal and interest. The company expects to have a cash flow of $136 if the economy continues as it is but that cash flow will decrease to $54 if the economy enters a recession. Should the company ever face the real possibility of bankruptcy, it will incur legal and other fees of $30. What amount will the bondholders be paid in the case of a recession

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Answer:

$24

Explanation:

Cashflow If economy as it is = $136

Cashflow if economy in recession = $54

In the event that the company goes bankrupt due to the recession, it will have to pay $30 in legal and other costs, so the company will set aside $30.

So, Bondholders payment = Cashflow in recession - legal & other cost

= $54 - $30

= $24

Hence, the bondholders will be paid $24 in the case of a recession.

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