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I Intro To Corporate Finance
- 4. Goals of a company
- 11. Debt and Equity as Contingent Claims $F Debt holders are promised $ F . If the value of the firm is less than $ F , they get the whatever the firm if worth. If the value of the firm is more than $ F , debt holders get a maximum of $ F . If the value of the firm is less than $ F , share holders get nothing. If the value of the firm is more than $ F , share holders get everything above $ F . Algebraically, the bondholder’s claim is: Min[$ F ,$ X ] Algebraically, the shareholder’s claim is: Max[0,$ X – $ F ] $F Payoff to debt holders Value of the firm (X) $F Payoff to shareholders Value of the firm (X)
- 12. $F Debt holders are promised $ F . If the value of the firm is less than $ F , the shareholder’s claim is: Max[0,$ X – $ F ] = $0 and the debt holder’s claim is Min[$ F ,$ X ] = $ X . The sum of these is = $ X If the value of the firm is more than $ F , the shareholder’s claim is: Max[0,$ X – $ F ] = $ X – $ F and the debt holder’s claim is: Min[$ F ,$ X ] = $ F . The sum of these is = $ X Combined Payoffs to Debt and Equity $F Combined Payoffs to debt holders and shareholders Value of the firm (X) Payoff to debt holders Payoff to shareholders