Question
If Testir declares bankruptcy, bankruptcy costs will equal $50 million, and the remaining $450 million (from sale of assets) will go to creditors (500-50=450 net
If Testir declares bankruptcy, bankruptcy costs will equal $50 million, and the remaining $450 million (from sale of assets) will go to creditors (500-50=450 net cash).
Instead of declaring bankruptcy, Testir proposes to exchange the firm's original old debt for a fraction ( or part of) of its new equity in a workout. If the old debtors accept the exchange, Testir can avoid bankruptcy.
What is the minimum fraction of the firm's new equity that Testir would need to offer to its creditors (i) for the creditors to be indifferent between bankruptcy and no bankruptcy; and (ii) for the creditors to choose the workout versus bankruptcy.
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