Consider Baxter Inc, which has a loan of $1m due in 1 year. - Market value of assets wil be only $900 000 at that time and baxter will default on its debt and hand over the existing assets to the debtholders -Now assume baxter is considering an investment oppertunity with an initial investment of $100 000, which equityholder would have to finance, and a sure risk free return of 50% The risk free discount rate is 5%

a) Given the above setup, how low must the repayment value of the loan at least shrink, such that equity holders would undertake the investment today? This gives us the highest possible repayment value of the loan that is still acceptable for the equityholders.

b) Which minimum repayment value will the debtholders at least demand?

Answer rating: 100% (QA)

a To determine how low the repayment value of the loan must shrink for equity holders to undertake t... View the full answer