assignment3 solutions

Assignment3 solutions

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Unformatted text preview: lders. f) Bond holders get 50 if sunshine and 10 if rain. PV(bond) = 30, PV(equity) = 30. Returns: bond = plus or minus 67%, equity = plus or minus 100%. This reorganization transfers value from bond holders to equity holders. Note that the total value of the firm is still bond + equity = 60. Equity holders have a lot to gain from this, at the expense of bond holders. Bottom line: equity holders like volatile cash flows because they get the upside and none of the downside. The opposite happens with less volatile cash flows: they benefit bond ho...
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This document was uploaded on 02/27/2014 for the course ECON 1745 at Harvard.

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