PV 1-p Debt -old Debt -new Equity

81.25 0.625 100 66 34

0.375 50 50 0

Debt 60.00 10%

Equity 21.25

Opportunity 5% 10 10.5

91.75 0.625 110.5 66 16 28.5

0.375 60.5 60.5 0 0

Debt new 10.00 60%

Check 10.00

Debt old 63.94

Equity 17.81
81.75

NPV change 0.50

Debt Overhang Problem
Future Probability Pay-off Debt Old

Scenario 1 70% 100.00 60.00

Firm 85.00
Scenario 2 30% 50.00 50.00

Debt Old: Face 60.00

Debt Old: PV 57.00
Debt Old: Yield 5%

Equity 28.00

Opportunity 3% 100 103

Future Probability Pay-off Debt Old

Scenario 1 70% 203.00 60.00
Firm after Inv. 188.00
103.00 Scenario 2 30% 153.00 60.00

Debt new: Face 100.00

Debt new: PV 100.00
Debt new: Yield 3%
Debt Old: Face 60.00
Debt Old: PV 60.00
Debt Old: Yield 0%

Equity 28.00

NPV change 3.00

3.00 30% 40%

1% Err:504 Err:504
2% Err:504 Err:504
3% Err:504 Err:504
4% Err:504 Err:504
5% Err:504 Err:504
6% Err:504 Err:504
7% Err:504 Err:504
8% Err:504 Err:504

3.00 25.0 50.0

1% 0.25 0.5
2% 0.5 1
3% 0.75 1.5
4% 1 2
5% 1.25 2.5
6% 1.5 3
7% 1.75 3.5
8% 2 4
Debt New Equity

40.00

0.00

Debt New Equity

103.00 40.00

93.00 0.00

CAPM: B*MRP

50% 60% 70% 80% 90%

Err:504 Err:504 Err:504 Err:504 Err:504
Err:504 Err:504 Err:504 Err:504 Err:504
Err:504 Err:504 Err:504 Err:504 Err:504
Err:504 Err:504 Err:504 Err:504 Err:504
Err:504 Err:504 Err:504 Err:504 Err:504
Err:504 Err:504 Err:504 Err:504 Err:504
Err:504 Err:504 Err:504 Err:504 Err:504
Err:504 Err:504 Err:504 Err:504 Err:504

75.0 100.0 125.0 150.0 175.0

0.75 1 1.25 1.5 1.75
1.5 2 2.5 3 3.5
2.25 3 3.75 4.5 5.25
3 4 5 6 7
3.75 5 6.25 7.5 8.75
4.5 6 7.5 9 10.5
5.25 7 8.75 10.5 12.25
6 8 10 12 14
CAPM: B*MRP
 Real Risk Free
Risk Free
Inflation
Expected Return
systematic risk
compensation Risk
country risk