Question
4. Company X has the following market value balance sheet: Cash $5 $25 Bonds outstanding Net Working Capital $15 $5 Common stock PV of future
4. Company X has the following market value balance sheet:
Cash $5 $25 Bonds outstanding
Net Working Capital $15 $5 Common stock
PV of future CFs $10
Who is likely to gain and who is likely to lose from the following maneuvers? (Assume that the
risk-free rate is zero. Also, suppose that the debt is risky). You may want to (but are not required
to) use numerical examples to support your conclusions.
a. Company X pays a cash dividend of $5 to its shareholders.
b. Company X halts operations, sells its fixed assets, and converts net working capital into $15
cash. Unfortunately the fixed assets fetch only $6 on the second-hand capital goods market.
The $26 cash is invested in Treasury Bills. (Here you can think of fixed assets as machinery
that would produce future cash flows with PV=$10 if the firm kept operating. Since the fixed
assets are sold, these future cash flows will not be realized now).
Step by Step Solution
There are 3 Steps involved in it
Step: 1
![blur-text-image](https://dsd5zvtm8ll6.cloudfront.net/includes/images/document_product_info/blur-text-image.webp)
Get Instant Access with AI-Powered Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
![blur-text-image](https://dsd5zvtm8ll6.cloudfront.net/includes/images/document_product_info/blur-subtext-image.webp)
Step: 3
![blur-text-image](https://dsd5zvtm8ll6.cloudfront.net/includes/images/document_product_info/blur-subtext-image.webp)
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started