CoinBase will generate a cash flow of $220M or $80M if next year the economy is
ID: 2806344 • Letter: C
Question
CoinBase will generate a cash flow of $220M or $80M if next year the economy is in boom
or recession respectively. The probability of recession is 30% and of boom is 70%. The firm’s
outstanding debt has a market value today of $100M and is due in a year. The cost of debt
(rD) is 8% and the unlevered cost of equity (rU) is 10%. The capital market is perfect.
21. You know that CoinBase will default in the recession state next year. What is the face
value (promised payment) of CoinBase’s debt?
(A) $ 127M
(B) $ 120M
(C) $ 112M
(D) $ 108M
Explanation / Answer
21: D= $108 million
This is computed as follows
PV of debt = 100 million
Period = 1 years
Rate = 8%
Using the FV excel function as =FV(8%,1,,-100) or
FV = I * ((1 + R) ^ T)
where I is the initial investment amount, R is the interest rate and T is the number of years the investment will be held.
Face value of debt = $108 million