The impact of a recession on a levered firm. Consider the simple firm we described on slides
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Question:
The impact of a recession on a levered firm. Consider the simple firm we described on slides 24 and 25 with fixed operating expenses (the right hand picture on both slides). We want to determine the impact of the firm’s capital structure on the size of the economic shock needed to push the firm into bankruptcy.
Required:
Keeping the invested capital fixed at $100, vary the amount of debt from $0 to $100, and for each level of debt, compute the level of revenues that makes earnings go to 0. Plot the computed revenue level (think of this as a bankruptcy threshold) against the % of debt.
Related Book For
Managerial Economics
ISBN: 978-0133020267
7th edition
Authors: Paul Keat, Philip K Young, Steve Erfle
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