# Question: Ralston Enterprises has assets that will have a market value

Ralston Enterprises has assets that will have a market value in one year as follows:

That is, there is a 1% chance the assets will be worth $70 million, a 6% chance the assets will be worth $80 million, and so on. Suppose the CEO is contemplating a decision that will benefit her personally but will reduce the value of the firm’s assets by $10 million. The CEO is likely to proceed with this decision unless it substantially increases the firm’s risk of bankruptcy.

a. If Ralston has debt due of $75 million in one year, the CEO’s decision will increase the probability of bankruptcy by what percentage?

b. What level of debt provides the CEO with the biggest incentive not to proceed with thedecision?

That is, there is a 1% chance the assets will be worth $70 million, a 6% chance the assets will be worth $80 million, and so on. Suppose the CEO is contemplating a decision that will benefit her personally but will reduce the value of the firm’s assets by $10 million. The CEO is likely to proceed with this decision unless it substantially increases the firm’s risk of bankruptcy.

a. If Ralston has debt due of $75 million in one year, the CEO’s decision will increase the probability of bankruptcy by what percentage?

b. What level of debt provides the CEO with the biggest incentive not to proceed with thedecision?

**View Solution:**## Answer to relevant Questions

If it is managed efficiently, Remel Inc. will have assets with a market value of $50 million, $100 million, or $150 million next year, with each outcome being equally likely. However, managers may engage in wasteful empire ...Suppose B&E Press paid dividends at the end of each year according to the schedule below. It also reduced its share count by repurchasing 5 million shares at the end of each year at the ex-dividend stock prices shown. ...Suppose Caterpillar, Inc., has 665 million shares outstanding with a share price of $74.77, and $25 billion in debt. If in three years, Caterpillar has 700 million shares outstanding trading for $83 per share, how much debt ...Consider Alcatel-Lucent’s project in Problem 5.In Problem 5, Suppose Alcatel-Lucent has an equity cost of capital of 10%, market capitalization of $10.8 billion, and an enterprise value of $14.4 billion. Suppose ...DFS Corporation is currently an all-equity firm, with assets with a market value of $100 million and 4 million shares outstanding. DFS is considering a leveraged recapitalization to boost its share price. The firm plans to ...Post your question