vulnerable corporation all equity corporation has 10000 shares priced 5 share firm consideri
Vulnerable Corporation, an all-equity corporation, has 10,000 shares priced at $5 per share. The firm is considering issuing debt valued at $25,000. The firm’s tax rate is 30%. The probability of the firm going into bankruptcy with this much debt is .1 (10%) and the cost of bankruptcy is expected to be 20% of the value of the debt plus $10,000 in legal costs, court fees, and expert analysis and a government claim of $10,000 for unpaid taxes. What is the total market value of the firm? If the firm reduced its bankruptcy risk to zero by reducing debt to $10,000, what would be the value of the firm?
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