Finance School of management Debtco: Notation y be the current market value of debtco 's assets ($100 million) V, be the market value of Debtco's assets a year from now e be the market value of debtco's stocks d be the market value of debtco's bonds uesTc
6 Finance School of Management Debtco: Notation – V be the current market value of Debtco’s assets ($100 million) – V1 be the market value of Debtco’s assets a year from now – E be the market value of Debtco’s stocks – D be the market value of Debtco’s bonds
Finance School of management Two Ways to Think about the Debtco's Market value To think of the assets of the firm real estates in Debtco's case, as having a market value of $100 million .o To imagine another firm that has the same assets as debtco but is financed entirely with equity, and the market value of this all-equity-financed twin of Debtco is $100 million uesTc
7 Finance School of Management Two Ways to Think about the Debtco’ s Market Value ❖ To think of the assets of the firm, real estates in Debtco’s case, as having a market value of $100 million ❖ To imagine another firm that has the same assets as Debtco but is financed entirely with equity, and the market value of this all-equity-financed “twin” of Debtco is $100 million
Finance School of management Payoffs for Bond and stock Issues 120 100 各80 E60 Bondvalue Stockvalue 0 0 20406080100120140160180200 Value of Firm(Millions) uesTc
8 Finance School of Management Payoffs for Bond and Stock Issues 0 20 40 60 80 100 120 0 20 40 60 80 100 120 140 160 180 200 Value of Firm (Millions) Value of Bond and Stock (Millions) BondValue StockValue
Finance School of management Probalility Density of a Firm's value 0.09 0.08 0.07 d0.06 0.05 0.04 0.03 0.02 0.01 0.00 020406080100120140160180200 Value of a firm uesTc
9 Finance School of Management Probalility Density of a Firm's Value 0.00 0.01 0.02 0.03 0.04 0.05 0.06 0.07 0.08 0.09 0 20 40 60 80 100 120 140 160 180 200 Value of a Firm Probability Density
Finance School of management Debtco Security Payoff Table ($000.000 Security Payoff State a Payoff State B Firr 140 70 Bond 80 70 Stock 60 0 uesTc 10
10 Finance School of Management Debtco Security Payoff Table ($’000,000) Security Payoff State A Payoff State B Firm 140 70 Bond 80 70 Stock 60 0