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BD_SM16 - Chapter 16 Financial Distress Managerial...

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Chapter 16 Financial Distress, Managerial Incentives, and Information 16-1. a. 150 135 95 80 0.25 $109.52 1.05 + + + × = million b. 100 100 95 80 0.25 $89.28 1.05 + + + × = million c. YTM = 100 89.29 – 1= 12% expected return = 5% d. equity = 50 35 0 0 0.25 $20.24 1.05 + + + × = million total value = 89.28 +20.24 = $109.52 million 16-2. a. 81 36 $4.5/ share 10 - = b. 36 8 million shares 4.5 = c. 81 $4.5/share 18 = 16-3. No. Some of these losses are due to declines in the value of the assets that would have occurred whether or not the firm defaulted. Only the incremental losses that arise from the bankruptcy process are bankruptcy costs. 16-4. a. Intuit Inc. – its customers will care about their ability to receive upgrades to their software. b. Allstate Corporation – its customers rely on the firm being able to pay future claims.
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124 Berk/DeMarzo • Corporate Finance 16-5. a. Office building—there are many alternate users who would be likely to value the property similarly. b. Raw materials—they are easier to reuse. c. Patent rights—they would be easier to sell to another firm. 16-6. a. 150 135 95 80 0.25 $109.52 1.05 + + + × = million b. 100 100 95 0.75 80 0.75 0.25 $78.87 1.05 + + × + × × = million c. 100 YTM 1 26.79% 78.87 = - = expected return = 5% d. 50 35 0 0 equity 0.25 $20.24 1.05 + + + = × = million total value 150 135 95 0.75 80 0.75 0.25 $99.11 1.05 + + × + × = × = million ( or 78.87 + 20.24 = $99.11 million) e. 109.52 $10.95/share 10 = f. 99.11 $9.91/share 10 = Bankruptcy cost lowers share price. Note that Gladstone will raise $78.87 million from the debt, and repurchase 78.87 7.96 million shares 9.91 = . Its equity will be worth $20.24 million, for a share price of 20.24 $9.91 10 7.96 = - after the transaction is completed. 16-7. a. 10 50 $75 0.08 - = million b. 75 $15/share 5 = c. 75 0.4 50 $19/share 5 + × = d. 9 50 0.4 50 0.08 $16/share 5 - + × =
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Chapter 16 Financial Distress, Managerial Incentives, and Information 125 16-8. a. The same price, $5.50/share, because financial transactions do not create value. b. 20 0.3 5.5 $6.10/share 10 × + = c. (6.1 – 5.75) × 10 = $3.5 million 16-9. a. r = 5% + 1.1 × (15% – 5%) = 16% 16 V $100 million 0.16 = = b. r = 5% + 1.1 × (15% – 5%) = 16% 15 V 0.35 40 $107.75 million 0.16 = + × = 16-10. According to tradeoff theory, tax shield adds value while financial distress costs reduce a firm’s value. The
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