EBK CORPORATE FINANCE
4th Edition
ISBN: 9780134202785
Author: DeMarzo
Publisher: VST
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Textbook Question
Chapter 21, Problem 10P
Consider the setting of Problem 9. Suppose that in the event Hem a Corp, defaults, $90 million of its value will be lost to bankruptcy costs. Assume there are no other market imperfections.
- a. What is the
present value of these bankruptcy costs, and what is their delta with respect to the firm’s assets? - b. In this case, what is the value and yield of Hema’s debt?
- c. In this case, what is the value of Hema’s equity before the dividend is paid? What is the value of equity just after the dividend is paid?
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Students have asked these similar questions
Which of the following is NOT an effect of the possibility of bankruptcy?
O reduce the possible payoff to stockholders.
increase financial distress costs.
reduce the interest rate on debt.
reduce the current market value of the firm.
5. Which ONE of the following best describes the value of the debt issued by a company?
The value of a call option on the firm's assets with an exercise price equal to the face value of the firm's
debt.
Minus the value of a put option on the firm's assets with an exercise price equal to the face value of the
firm's debt.
The value of the firm's assets minus the value of a call option on the firm's assets with an exercise price
equal to the face value of the firm's debt
Minus the value of a call option on the firm's assets with an exercise price equal to the face value of the
firm's debt.
The value of a firm's assets minus the value of a put option on the firm's assets with an exercise price equal
to the face value of the firm's debt.
8. Which of the following does the trade-off theory predict? A. Bankruptcy costs
mean having no debt is always optimal. B. Reducing leverage always reduces
firm value. C. In the long run the firm's capital structure converges to the optimal
one. D. None of the above.
Chapter 21 Solutions
EBK CORPORATE FINANCE
Ch. 21.1 - What is the key assumption of the binomial option...Ch. 21.1 - Why dont we need to know the probabilities of the...Ch. 21.1 - Prob. 3CCCh. 21.2 - What are the inputs of the Black-Scholes option...Ch. 21.2 - What is the implied volatility of a stock?Ch. 21.2 - How does the delta of a call option change as the...Ch. 21.3 - What are risk-neutral probabilities? How can they...Ch. 21.3 - Does the binominal model or Black-Scholes model...Ch. 21.4 - Is the beta of a call greater or smaller than the...Ch. 21.4 - What is the leverage ratio of a call?
Ch. 21.5 - Prob. 1CCCh. 21.5 - The fact that equity is a call option on the firms...Ch. 21 - The current price of Estelle Corporation stock is...Ch. 21 - Using the information in Problem 1, use the...Ch. 21 - Suppose the option in Example 21.11 actually sold...Ch. 21 - Eagletrons current stock price is 10. Suppose that...Ch. 21 - What is the highest possible value for the delta...Ch. 21 - Hema Corp. is an all equity firm with a current...Ch. 21 - Consider the setting of Problem 9. Suppose that in...Ch. 21 - Roslin Robotics stock has a volatility of 30% and...Ch. 21 - Rebecca is interested in purchasing a European...Ch. 21 - Using the data in Table 21.1, compare the price on...Ch. 21 - Consider again the at-the-money call option on...Ch. 21 - Harbin Manufacturing has 10 million shares...Ch. 21 - Using the information on Harbin Manufacturing in...Ch. 21 - Using the information in Problem 1, calculate the...Ch. 21 - Prob. 23PCh. 21 - Prob. 24PCh. 21 - Calculate the beta of the January 2010 9 call...Ch. 21 - Consider the March 2010 5 put option on JetBlue...
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- 1) Two years ago ABC company limited recorded a huge loss leading to bankruptcy. how is it possible that a firm announces a record breaking loss yet its stock price rises when the annoucement is made? Explain what the market reaction will be in an efficient market if the firm announces a fully anticipated filing for bankruptcy. 2) Distinquish between coupon rate, yield to maturity and current yieldarrow_forward1. Suppose that a financial institution has a negative $25 million difference between its assets and liabilities. Is the institution exposed to refinancing risk or reinvestment risk and what will happen to net income if there is a rise in interest rates? 2. Suppose a financial institution has a positive $25 million difference between its assets and liabilities. Is the institution exposed to refinancing risk or reinvestment risk and what will happen to net income if there is a drop in interest rates?arrow_forwardUnder Modigliani and Miller's assumption of perfect capital markets, which of the following is NOT CORRECT? A) The proper WACC equation under perfect capital markets is the "pre-tax" WACC B) Taxes are irrelevant C) Reducing the debt ratio can cause the cost of debt and the cost of equity to decline, even as the WACC stays the same. D) The WACC does not change as the weights of debt and equity change E) Bankruptcy costs reduce the amount bondholders receive when bankruptcy occursarrow_forward
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