Capital Structure: Limits to the Use of Debt
Firms do not use an infinite amount of debt, why not?
-Bankruptcy/financial distress costs
17.1 Costs of financial distress
Example: Two firms with identical cash flow
Valuation and Capital Budgeting for a Levered Firm
If there are benefits to leverage, calculation of NPV will depend
3 ways to take into account the benefits of leverage in NPV
Fin 801: CHAPTER 20
Issuing Securities to the Public
FI 801- Corporate Finance- Professor Johnson
Chapter 17- Problems
1. Good Time Co. is a regional chain department store. It will remain in business for one more
year. The estimated probability of a boom year for next year is .60 and the estimated pro
Finance 801- Solutions to Problems
Chapter 17- Solutions to Problems
(a) If there are no bankruptcy costs, then in the good state equity pays off 100 and in the
bad state equity pays off 0. Thus equity yields an expected payoff of .60 x 100 = 60.
Problem set 5
1. The owner of Gator Airlines wishes to take her stock public for the first time by selling 3
million shares. The underwriter determines that the true value will be $15 with probability .
4 and $8 with probability .6.
Problem set #5 answers
Chapter 20- Solutions to Problems
At any price p for which the entire issue will sell, the uninformed must be
willing to put in their order for 6 million shares. Since the informed
investors will only put in an o