Question
You announce that you will issue $20M worth of one-year bonds tomorrow. You would like to determine the proper yield to offer on these bonds.
You announce that you will issue $20M worth of one-year bonds tomorrow. You would like to determine the proper yield to offer on these bonds. Because your asset cash flows are independent of market conditions, investors expect a return of 5 percent (the risk-free rate) on this debt investment. Your firm has 5M shares outstanding priced at $15 per share prior to this announcement.
d) The expected bankruptcy cost will negatively affect the share price. What will be the new share price following the announcement of the debt issuance? (Hint: the value of equity will decrease by the present value of the expected bankruptcy cost.)
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