Ralston Enterprises has assets that will have a market value in one year as shown below: That
Question:
Ralston Enterprises has assets that will have a market value in one year as shown below:
That is, there is a 3% chance the assets will be worth $65 million, a 7% chance the assets will be worth $75 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 $70 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 the decision?
Step by Step Answer:
Corporate Finance The Core
ISBN: 9781292158334
4th Global Edition
Authors: Jonathan Berk, Peter DeMarzo