A firm has outstanding debt with face value of $500,000 due at the end of the...

 

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A firm has outstanding debt with face value of $500,000 due at the end of the year. The value of firm's assets (i.c., firm value) can be any value between $0 and $1,000,000. (a) Fill in the following table: Firm value at year end ($ '000) 0 100 200 300 400 500 600 700 800 900 1,000 Debt holders' payoff at year end Equity holders' payoff at year end (b) Draw the payoff profile of the debt holders as a function of firm value at year end. Debt Payoff 500 Equity Payoff (c) Draw the payoff profile of the equity holders as a function of firm value at year end. Firm Value 500 Firm Value (d) What is the underlying assumption that prevents the payoff of equity holders to drop below SO, even in cases where debt holders do not get fully paid? A firm has outstanding debt with face value of $500,000 due at the end of the year. The value of firm's assets (i.c., firm value) can be any value between $0 and $1,000,000. (a) Fill in the following table: Firm value at year end ($ '000) 0 100 200 300 400 500 600 700 800 900 1,000 Debt holders' payoff at year end Equity holders' payoff at year end (b) Draw the payoff profile of the debt holders as a function of firm value at year end. Debt Payoff 500 Equity Payoff (c) Draw the payoff profile of the equity holders as a function of firm value at year end. Firm Value 500 Firm Value (d) What is the underlying assumption that prevents the payoff of equity holders to drop below SO, even in cases where debt holders do not get fully paid?