expected value of equity | Business & Finance homework help

Consider the setting of Problem 21, and suppose Petron Corp. has debt with a face value of $40 million outstanding. For simplicity assume all risk is idiosyncratic, the risk-free interest rate is zero, and there are no taxes.

a. What is the expected value of equity, assuming Petron will choose the strategy that maxi- mizes the value of its equity? What is the total expected value of the firm?

b. Suppose Petron issues equity and buys back its debt, reducing the debt’s face value to $5 million. If it does so, what strategy will it choose after the transaction? Will the total value of the firm increase?

c. Suppose you are a debt holder, deciding whether to sell your debt back to the firm. If you expect the firm to reduce its debt to $5 million, what price would you demand to sell your debt?

d. Based on your answer to (c), how much will Petron need to raise from equity holders in order to buy back the debt?

e. How much will equity holders gain or lose by recapitalizing to reduce leverage? How much will debt holders gain or lose? Would you expect Petron’s management to choose to reduce its leverage?

Calculate your essay price
(550 words)

Approximate price: $22

How it Works


It only takes a couple of minutes to fill in your details, select the type of paper you need (essay, term paper, etc.), give us all necessary information regarding your assignment.


Once we receive your request, one of our customer support representatives will contact you within 24 hours with more specific information about how much it'll cost for this particular project.


After receiving payment confirmation via PayPal or credit card – we begin working on your detailed outline, which is based on the requirements given by yourself upon ordering.


Once approved, your order is complete and will be emailed directly to the email address provided before payment was made!