Question

AZC Company is currently valued at $300 in a boom and $160 otherwise. The chance of a boom is 35 percent. What is the value of the firm to the shareholders if the firm owes $200 to its debtholders?

Answer 1

Answer:

$35

Explanation:

Calculation for the value of the firm to the shareholders

Using this formula

Value of firm to Shareholder=Probability Boom*(Current value boom- Debt)+Probability Recession *(Current value recession - Debt)

Value of firm to Shareholder = .35 × MAX[($300 - $200),0] + (1 - .35) × MAX[($160 - $200),0

Value of firm to Shareholder=0.35%*$100 +0.65*$0

Value of firm to Shareholder=$35+$0

Value of firm to Shareholder=$35

Therefore the Value of firm to Shareholder will be $35

Answer 2

The value of the firm to the shareholders if the firm owes $200 to its debtholders is $35

We can compute the value of the firm to the shareholders as :

Value of firm to Shareholder = Probability Boom * (Current value boom - Debt) + Probability Recession * (Current value recession - Debt)

Value of firm to Shareholder = 0.35 × MAX[($300 - $200),0] + (1 - .35) × MAX[($160 - $200),0

Value of firm to Shareholder = 0.35% * $100 + 0.65 * $0

Value of firm to Shareholder = $35 + $0

Value of firm to Shareholder  = $35

It therefore means that the value of the firm to the shareholders if the firm owes $200 to its debtholders is $35

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