I don't see how bond holders get paid back in a bankruptcy situation, not at par anyway. Why would a company use bonds to buy back shares in a company that is going to fail? In any event, why would anyone invest in the scenario that you describe, when any role in the transaction would almost certainly end in a loss?

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A company's assets will have a value, one year from now, equal to $45 millions if the economic conditions are good or to $8 millions if the conditions are bad, and the two scenarios are equally likely. The company currently has no debt and, after one year, it will terminate its operations. Today (that is one year before terminating its operation), the company has decided to go through with a recapitalization issuing a zero coupon bond with face value $10 millions and maturity one year and buying back its own shares with the proceeds. The expected return required by bond holders is 5.45%. In case of bankruptcy there will be estimated direct bankruptcy cost for $564,000 and indirect bankruptcy costs for $789,000. The return on levered equity after the recapitalization will

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be 15%. At the moment (that is before the recapitalization) the company has 100,000 shares outstanding. Assume no taxation.

(a) What is the value of levered equity? [5 Points]

(b) What is the amount of money raised from bond holders when the bond is issued? [5 Points]

(c) How many shares will be bought back? [12 Points]

Kindly show the calculations