Consider the following two firms, both with an initial overall value of $1 billion. The first has
Question:
Consider the following two firms, both with an initial overall value of $1 billion. The first has $900 in debt and $100 million in equity, which the second has $100 million in debt and only $900 million in equity. Suppose that, as a simplification, financial distress occurs then the firm loses all its equity value, and assume that at that point the shareholders are wiped out and the firm is taken over by its debt holders, who either liquidate the firm by selling its assets and distributing its proceeds, or continue to run the firm as a going concern under new management. Assume that, in both cases, the firms are managed by CEOs with a strong preference for corporate jets, lush offices, and attractive assistants.
Which CEO is more likely to destroy more value in the process?
Financial Markets and Institutions
ISBN: 978-0077861667
6th edition
Authors: Anthony Saunders, Marcia Cornett