Corporate Finance (4th Edition) (Pearson Series in Finance) - Standalone book

4th Edition

ISBN: 9780134083278

Author: Jonathan Berk, Peter DeMarzo

Publisher: PEARSON

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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?

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Chapter 16, Problem 21P

Chapter 16, Problem 23P

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Chapter 16 Solutions

Corporate Finance (4th Edition) (Pearson Series in Finance) - Standalone book

Ch. 16.1 - Prob. 1CC Ch. 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. 1CC Ch. 16.3 - True or False: If bankruptcy costs are only...Ch. 16.4 - Prob. 1CC Ch. 16.4 - According to the trade-off theory, all else being...Ch. 16.5 - Prob. 1CC Ch. 16.5 - Why would debt holders desire covenants that...

Ch. 16.6 - Prob. 1CC Ch. 16.6 - Prob. 2CC Ch. 16.7 - Coca-Cola Enterprises is almost 50% debt financed...Ch. 16.7 - Why would a firm with excessive leverage not...Ch. 16.7 - Describe how management entrenchment can affect...Ch. 16.8 - How does asymmetric information explain the...Ch. 16.8 - Prob. 2CC Ch. 16.9 - Prob. 1CC Ch. 16.9 - Prob. 2CC Ch. 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. 4P Ch. 16 - Prob. 5P Ch. 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. 10P Ch. 16 - Prob. 11P Ch. 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. 17P Ch. 16 - Consider a firm whose only asset is a plot of...Ch. 16 - Prob. 19P Ch. 16 - Prob. 20P Ch. 16 - Prob. 21P Ch. 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. 27P Ch. 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. 32P Ch. 16 - Prob. 33P

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