chapter 16 homework


16.16 A cash flow right is the amount of cash you are supposed to receive as a function of the under-lying value of the firm. It is not an “enforcement” right. You usually need the latter to obtain the former.
16.20 APR can be a shorthand for “absolute priority rule.” It states that more senior securities are satisfied first, before more junior securities receive anything. It can also be an abbreviation for “annual percentage rate,” which appeared in Section
16.22 If the firm is worth less than 8,000 x $20,000 = $160,000,000, the bondholders will own the entire firm, and the shareholders will receive nothing. If the bondholders convert, there will be 800,000 + 1,200,000 = 2 million shares outstanding, and the bondholders will own 800,000/2,000,000 = 40% of the firm. Therefore, they will be interested in converting when 40% of the firm’s value exceeds $160,000,000. Because $160,000,000/0.4 = $400 million, the bondholders will be indifferent up to and including this point, but will convert if the firm value exceeds this amount. The graph of flows to the bondholders will be a diagonal  until the firm value reaches $160,000,000. It will then be a horizontal line until firm value reaches $400million, after which it will be a line with a slope of 0.40. The equity line will be horizontal until the firm value reaches $160,000,000, a diagonal (slope = 1.0) until firm value reaches $400 million, and a line with a slope of 0.60 beyond that point.
16.24 The ability to vote to appoint the corporate board, which controls management.

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