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Unformatted text preview: study of default of debt payments shows that 6% of the firms with rating Aa1 and 7% of firms with ratings A1 default on their interest payments and enter financial distress. Industry spets estimate that a typical firm in the auto industry suffers permanent losses equivalent to about 5% of its total market value during financial distress.
Chrysler’s total market value of debt and equity is $10 million 7 Outline of Exercise What is Delphi’s allequity value under current management?
What is Delphi’s allequity value under Chrysler’s management?
What are the financingside effects of the proposed financing methods?
What is Delphi’s APV and should Chrysler buy it from $150,000? What are the sources of value? Are there any other strategic considerations?
8 1. Delphi’s all-equity value under current
management Calculate Delphi’s unlevered cost of equity Calculate unlevered cash flows for early years Calculate cash flows for later years – these will lead to a terminal value estimate
Discount cash flows back to year 0 using the unlevered cost of equity
Assume that cash flows starting in year 1 will accrue to the buyer
9 Delphi’s Unlevered Cost of Equity Traded supplier...
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- Spring '13