Week 9 Solutions-2 - Week 9 Tutorial Solutions Note This is...

Info icon This preview shows pages 1–2. Sign up to view the full content.

View Full Document Right Arrow Icon
Week 9 Tutorial Solutions Note: This is a homework submission week. Please make sure you submit your hand-written solutions to your tutor. All the questions should be attempted. Chapter 18 18. Agency costs Net working capital $20 $25 Bonds Outstanding Fixed assets $10 $5 Common stock Total assets $30 $30 Total value Who gains and who loses from the following maneuvers? a. Circular scrapes up $5 in cash and pays a cash dividend. Stockholders win. Bond value falls since the value of assets securing the bond has fallen. b. Circular halts operations, sells its fixed assets, and converts net working capital into $20 cash. Unfortunately the fixed assets fetch only $6 on the secondhand market. The $26 cash is invested in Treasury bills. Bondholder wins if we assume the cash is left invested in Treasury bills. The bondholder is sure to get $26 plus interest. Stock value is zero because there is no chance that the firm value can rise above $50. c. Circular encounters an acceptable investment opportunity, NPV = 0, requiring an investment of $10. The firm borrows to finance the project. The new debt has the same security, seniority, etc., as the old. The bondholders lose. The firm adds assets worth $10 and debt worth $10. This would increase Circular’s debt ratio, leaving the old bondholders more exposed. The old bondholders’ loss is the stockholders’ gain.
Image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Image of page 2
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern