Worksheet 9. Suppose a company borrows $1 million debt to invest in a project that generates uncertain cash flow of 0~$2 million. The debt has to be repaid (interest rate is zero) when the project's cash flow is realized. 1. No bankruptcy costs and no renegotiations. 2 DEBT VALUE ($MILLION) 1.5 0.5 EQUITY VALUE ($MILLION) 1.5 0.5 COMPANY VALUE ($MILLION) 1.5 0.5 1.5 2 0.5 1.5 2 0.5 1.5 2 COMPANY REVENUE ($MILLION) COMPANY REVENUE ($MILLION) COMPANY REVENUE ($MILLION) 2. 50% bankruptcy costs and no renegotiations. DEBT VALUE EQUITY VALUE COMPANY VALUE 2 2 DEBT VALUE ($MILLION) 1.5 1.5 1.5 0.5 EQUITY VALUE ($MILLION) 0.5 COMPANY VALUE ($MILLION) 0.5 0.5 1.5 2 0.5 1.5 2 0.5 1.5 COMPANY REVENUE ($MILLION) COMPANY REVENUE ($MILLION) COMPANY REVENUE ($MILLION) 3. 50% bankruptcy costs with renegotiations (equal bargaining power) DEBT VALUE EQUITY VALUE COMPANY VALUE 2 T VALUE ($MILLION) 1.5 ITY VALUE ($MILLION 1.5 ANY VALUE ($MILLION) 1.5