Consider the setting of Problem 9. Suppose that in the event Hema Corp. defaults, $90 million of its value will be lost to bankruptcy costs. Assume there are no other market imperfections.
a. What is the present value of these bankruptcy costs, and what is their delta with respect to the firm’s assets?
b. In this case, what is the value and yield of Hema’s debt?
c. In this case, what is the value of Hema’s equity before the dividend is paid? What is the value of equity just after the dividend is paid?

  • CreatedAugust 06, 2014
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