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The possible outcomes of a firm’s value at time 1 are as below. At time 1,...

The possible outcomes of a firm’s value at time 1 are as below. At time 1, the debtholders are entitled $8 M payment from the firm. In other words, the firm owes its bondholders $8 M at time 1.

Please fill out the payoffs to bondholders and stockholders at each outcome.

Probability Firm Value at Time 1 Value of stake of Bondholders Value of stake of Stockholders
10% $6M
15% $8M
45% $15M
30% $20M   


  1. What is the expected value of the firm at time 1?
  2. What is the expected value of the stake of bondholders at time 1?
  3. What is the expected value of the stake of the stockholders at time 1?

Solutions

Expert Solution

What is the expected value of the firm at time 1?

Expected Value of firm = Sum of (Probability * Value) = $14.55 Million

What is the expected value of the stake of bondholders at time 1?

the payment will be first made to debt holders. Thus Value of debt holders =  $7.80 Million

What is the expected value of the stake of the stockholders at time 1?

Value of Equity holders =  $6.75 Million

jeff jeffy answered 1 year ago
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