List five general categories of indirect costs associated with bankruptcy.
Because debtor-in-possession (DIP)financing is senior to all existing creditors: A)it allows a firm that has filed for bankruptcy renewed access to financing to keep operating. B)it is an important cost for firms that rely heavily on trade credit. C)it is likely to be small for producers of raw materials,as the value of those goods,once delivered,does not depend on the seller's continued success. D)it allows debtors to assume they may have an opportunity to avoid their obligations to a firm.
Which of the following statements is FALSE? A)Debt holders are not foolish-they recognize that when the firm defaults,they will not be able to get the full value of the assets.As a result,they will pay less for the debt initially. B)The costs of financial distress represent an important departure from Modigliani and Miller's assumption of perfect capital markets. C)Levered firms risk incurring financial distress costs that reduce the cash flows available to investors. D)When securities are fairly priced,the original shareholders of a firm pay the future value of the costs associated with bankruptcy and financial distress.
Use the information for the question(s)below. Monsters Incorporated (MI)is ready to launch a new product.Depending upon the success of this product,MI will have a value of either $100 million,$150 million,or $191 million,with each outcome being equally likely.The cash flows are unrelated to the state of the economy (i.e.risk from the project is diversifiable)so that the project has a beta of 0 and a cost of capital equal to the risk-free rate,which is currently 5%.Assume that the capital markets are perfect. -Assuming that in the event of default,20% of the value of MI's assets will be lost in bankruptcy costs,the initial value of MI's equity without leverage is closest to: A)$150 million. B)$147 million. C)$140 million. D)$133 million.