
Corporate Finance
3rd Edition
ISBN: 9780132992473
Author: Jonathan Berk, Peter DeMarzo
Publisher: Prentice Hall
expand_more
expand_more
format_list_bulleted
Concept explainers
Textbook Question
Chapter 16, Problem 22P
Consider the setting of Problem 21 , and suppose Petron Corp. has debt with a face value of $40 million outstanding. For simplicity assume all risk is idiosyncratic, the risk-free interest rate is zero, and there are no taxes.
- a. What is the expected value of equity, assuming Petron will choose the strategy that maximizes the value of its equity? What is the total expected value of the firm?
- b. Suppose Petron issues equity and buys back its debt, reducing the debt’s face value to $5 million. If it does so, what strategy will it choose after the transaction? Will the total value of the firm increase?
- c. Suppose you are a debt holder, deciding whether to sell your debt back to the firm. If you expect the firm to reduce its debt to $5 million, what price would you demand to sell your debt?
- d. Based on your answer to (c), how much will Petron need to raise from equity holders in order to buy back the debt?
- e. How much will equity holders gain or lose by recapitalizing to reduce leverage? How much will debt holders gain or lose? Would you expect Petron's management to choose to reduce its leverage?
Expert Solution & Answer

Want to see the full answer?
Check out a sample textbook solution
Students have asked these similar questions
Professor Brown has just retired after 25 years with Jessup University. Her total pension funds have an accumulated value of $504,000, and her life expectancy is 25 more years. Her pension fund manager assumes he can earn a 9 percent return on her assets. What will be her yearly annuity for the next 25 years?
Caroline Moore has a contract in which she will receive the following payments for the next four years: $10,000, $11,000, $9,000, and $8,000. She will then receive an annuity of $13,000 a year from the end of the 4th through the end of the 10th year. The appropriate discount rate is 11 percent. What is the percent value of all future payments?
Nick Weber wants to have $120,000 at the end of 10 years, and his only investment outlet is an 8 percent long-term certicate of deposit (compounded annually). With the certificate of deposit, he made an initial investment at the beginning of the year year. How much does Nick need to deposit to get the $120,000 at the end of 10 years.
a. What amount could Nick pay at the end of each year annually for 10 years to achieve this same objective?
Chapter 16 Solutions
Corporate Finance
Ch. 16.1 - Prob. 1CCCh. 16.1 - Does the risk of default reduce the value of the...Ch. 16.2 - If a firm files for bankruptcy under Chapter 11 of...Ch. 16.2 - Why are the losses of debt holders whose claims...Ch. 16.3 - Prob. 1CCCh. 16.3 - True or False: If bankruptcy costs are only...Ch. 16.4 - Prob. 1CCCh. 16.4 - According to the trade-off theory, all else being...Ch. 16.5 - Prob. 1CCCh. 16.5 - Why would debt holders desire covenants that...
Ch. 16.6 - Prob. 1CCCh. 16.6 - Prob. 2CCCh. 16.7 - Prob. 1CCCh. 16.7 - Prob. 2CCCh. 16.8 - How does asymmetric information explain the...Ch. 16.8 - Prob. 2CCCh. 16.9 - Prob. 1CCCh. 16.9 - Prob. 2CCCh. 16 - Gladstone Corporation is about to launch a new...Ch. 16 - Baruk Industries has no cash and a debt obligation...Ch. 16 - When a firm defaults on its debt, debt holders...Ch. 16 - Prob. 4PCh. 16 - Prob. 5PCh. 16 - Suppose Tefco Corp. has a value of 100 million if...Ch. 16 - You have received two job offers. Firm A offers to...Ch. 16 - As in Problem 1, Gladstone Corporation is about to...Ch. 16 - Kohwe Corporation plans to issue equity to raise...Ch. 16 - Prob. 10PCh. 16 - Prob. 11PCh. 16 - Hawar International is a shipping firm with a...Ch. 16 - Your firm is considering issuing one-year debt,...Ch. 16 - Marpor Industries has no debt and expects to...Ch. 16 - Real estate purchases are often financed with at...Ch. 16 - On May 14, 2008, General Motors paid a dividend of...Ch. 16 - Prob. 17PCh. 16 - Consider a firm whose only asset is a plot of...Ch. 16 - Prob. 19PCh. 16 - Prob. 20PCh. 16 - Prob. 21PCh. 16 - Consider the setting of Problem 21 , and suppose...Ch. 16 - Consider the setting of Problems 21 and 22, and...Ch. 16 - You own your own firm, and you want to raise 30...Ch. 16 - Empire Industries forecasts net income this coming...Ch. 16 - Ralston Enterprises has assets that will have a...Ch. 16 - Prob. 27PCh. 16 - If it is managed efficiently, Remel Inc. will have...Ch. 16 - Which of the following industries have low optimal...Ch. 16 - According to the managerial entrenchment theory,...Ch. 16 - Info Systems Technology (IST) manufactures...Ch. 16 - Prob. 32PCh. 16 - Prob. 33P
Additional Business Textbook Solutions
Find more solutions based on key concepts
(Record inventory transactions in the periodic system) Wexton Technologies began the year with inventory of 560...
Financial Accounting (12th Edition) (What's New in Accounting)
••• 4.13 As you can see in the following table, demand for heart transplant surgery at Washington General Hospi...
Operations Management
19. What types of businesses are most likely to use a perpetual inventory system?
Financial Accounting: Tools for Business Decision Making, 8th Edition
Assume that the bonds are selling for the following amounts:
Microsoft $1,100
GE Capital $1,030
Morgan Stanley ...
Foundations Of Finance
Give three examples of industries that use process-costing systems.
Horngren's Cost Accounting: A Managerial Emphasis (16th Edition)
1-1. Define marketing and outline the steps in the marketing process. (AASCB: Communication)
Marketing: An Introduction (13th Edition)
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Similar questions
- High Hand Nursery has total assests of $900,000, current liabilities of $202,000, and long-term liabilities of $104,000. There is $90,000 in preferred stock outstanding. Twenty thousand shares of common stock have been issued. a. Compute book value (net worth) per share. b. If there is $40,000 in earnings available to common stockholders for dividends, and the firm's stock has a P/E of 22 times earnings per share, what is the current price of the stock? c. What is the ratio of market value per share to book value per share?arrow_forwardNeed the WACC % WACC and Optimal Capital Structure F. Pierce Products Inc. is considering changing its capital structure. F. Pierce currently has no debt and no preferred stock, but it would like to add some debt to take advantage of the tax shield. Its investment banker has indicated that the pre-tax cost of debt under various possible capital structures would be as follows: Market Debt-to-Value Ratio (wd) Market Equity-to-Value Ratio (ws) Market Debt-toEquity Ratio (D/S) Before-Tax Cost ofDebt (rd) 0.0 1.0 0.00 6.0 % 0.10 0.90 0.1111 6.4 0.20 0.80 0.2500 7.0 0.30 0.70 0.4286 8.2 0.40 0.60 0.6667 10.0 F. Pierce uses the CAPM to estimate its cost of common equity, rs, and at the time of the analaysis the risk-free rate is 5%, the market risk premium is 7%, and the company's tax rate is 25%. F. Pierce estimates that its beta now (which is "unlevered" because it currently has no debt) is 1.4. Based on this information, what…arrow_forwardNed's Co. has an average collection period of 45 days and an operating cycle of 130 days. It has a policy of keeping at least $10 on hand as a minimum cash balance, and has a beginning cash balance for the first quarter of $20. Beginning receivables for the quarter amount to $35. Sales for the first and second quarters are expected to be $110 and $125, respectively, while purchases amount to 80% of the next quarter's forecast sales. The accounts payable period is 90 days. What are the cash disbursements for the first quarter? Question 4 options: $92 $88 $76 $100 $110arrow_forward
- Liberal credit terms for customers is associated with a restrictive short-term financial policy. Question 3 options: True Falsearrow_forwardAn accounts payable period decrease would increase the length of a firm's cash cycle. Consider each in isolation. Question 6 options: True Falsearrow_forwardWhich of the following is the best definition of cash budget? Question 10 options: Costs that rise with increases in the level of investment in current assets. A forecast of cash receipts and disbursements for the next planning period. A secured short-term loan that involves either the assignment or factoring of the receivable. The time between sale of inventory and collection of the receivable. The time between receipt of inventory and payment for it.arrow_forward
- Short-term financial decisions are typically defined to include cash inflows and outflows that occur within __ year(s) or less. Question 9 options: Four Two Three Five Onearrow_forwardA national firm has sales of $575,000 and cost of goods sold of $368,000. At the beginning of the year, the inventory was $42,000. At the end of the year, the inventory balance was $45,000. What is the inventory turnover rate? Question 8 options: 8.46 times 13.22 times 43.14 times 12.78 times 28.56 timesarrow_forwardThe formula (Cash cycle + accounts payable period) correctly defines the operating cycle. Question 7 options: False Truearrow_forward
- An accounts payable period decrease would increase the length of a firm's cash cycle. Consider each in isolation. Question 6 options: True Falsearrow_forwardWhich of the following issues is/are NOT considered a part of short-term finance? Question 5 options: The amount of credit that should be extended to customers The firm determining whether to issue commercial paper or obtain a bank loan The amount of the firms current income that should be paid out as dividends The amount the firm should borrow short-term A reasonable level of cash for the firm to maintainarrow_forwardLiberal credit terms for customers is associated with a restrictive short-term financial policy. Question 3 options: True Falsearrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
- Intermediate Financial Management (MindTap Course...FinanceISBN:9781337395083Author:Eugene F. Brigham, Phillip R. DavesPublisher:Cengage LearningFinancial Reporting, Financial Statement Analysis...FinanceISBN:9781285190907Author:James M. Wahlen, Stephen P. Baginski, Mark BradshawPublisher:Cengage Learning


Intermediate Financial Management (MindTap Course...
Finance
ISBN:9781337395083
Author:Eugene F. Brigham, Phillip R. Daves
Publisher:Cengage Learning

Financial Reporting, Financial Statement Analysis...
Finance
ISBN:9781285190907
Author:James M. Wahlen, Stephen P. Baginski, Mark Bradshaw
Publisher:Cengage Learning
Portfolio return, variance, standard deviation; Author: MyFinanceTeacher;https://www.youtube.com/watch?v=RWT0kx36vZE;License: Standard YouTube License, CC-BY