Suppose that a firm has 5 bondholders each expecting to be paid today their principal of $1 million each. The firm is in default, as its going-concern value is only $3 million, falling short of the $5 million to be repaid. The firm could liquidate and sell all of its assets for a value of $1 million, so that each bondholder would recover $200,000 on their claim. The firm offers its bondholders a debt-for-equity swap, but four of out the five bondholders must participate and become equityholders for the swap to succeed. In the table below, calculate the "lower bound" payoff if only four bondholders participate and the "upper bound" payoff if all five bondholders participate. The correct answer is lower bound=$500,000 and upper bound=$600,000

Suppose that a firm has 5 bondholders each expecting to be paid today their principal of $1 million each. The firm is in default, as its going-concern value is only $3 million, falling short of the $5 million to be repaid. The firm could liquidate and sell all of its assets for a value of $1 million, so that each bondholder would recover $200,000 on their claim. The firm offers its bondholders a debt-for-equity swap, but four of out the five bondholders must participate and become equityholders for the swap to succeed. In the table below, calculate the "lower bound" payoff if only four bondholders participate and the "upper bound" payoff if all five bondholders participate. The correct answer is lower bound=$500,000 and upper bound=$600,000

Corporate Fin Focused Approach

5th Edition

ISBN:9781285660516

Author:EHRHARDT

Publisher:EHRHARDT

Chapter9: The Cost Of Capital

Section: Chapter Questions

Problem 16P

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