debtholder–equityholderconflictsandcorporatefinance(编辑修改稿)

debtholder–equityholderconflictsandcorporatefinance(编辑修改稿)内容摘要：

10 million if economy is bad. The probability for each state is 50%. Debt Due From Existing Assets From ShotTerm Project From LongTerm Project Year 1: $100 million $50 million $50 million $20 million Year 2: 40 million 60 million in good state 0 million 40 million 10 million in bad state The Case of Applied Textronics  Assume that the existing debt only allows new issuance of subordinated debt.  If the long term project is taken, the firm needs to issue additional $30 million to meet the debt obligation at year 1($100 $50 $20). To provide the funds new debt holders will require a face value F = $50 (50* in good state +10* in bad state =30).  If the short term project is taken the firm do not need to issue additional debt. The Case of Applied Textronics  If the short term project is taken:  Shareholders get $10 ((6040)* in good state+ 0* in bad state) million.  Existing debt holders get $100 million at year 1 and $25 (40* in good state +10* in bad state) million at year 2.  If the long term project is taken:  Shareholders get $5 ((60 – 50)* in good state + 0* in bad state) million.  Existing debt holders get $100 million at year 1 and $40 million at year 2.  New debt holders get $30 (50* + 10*) million at year 2 and provide $30 million at year 1. They just earn the equilibrium return.  By taking the long term project, the existing debt holders absorb the $10 million difference in the value of the two project and transfers another $5 million from the value of shareholders. The Case of Applied Textronics  The NPV of the long term project is higher than that of the short term project, 20 million + 40 million 50 million.  Long term project paying off cash flows later requires the firm with risky debt to issue additional debt in the intermediate period.  This incurs higher required return from new debt holders. Therefore the riskless long term project reduces the risk of existing debt and make the equity less valuable.  Firms with large amounts of debt tend to pass up high NPV projects in favor of lower NPV projects that pay off sooner. The Asset Substitution Problem Shareholders can realize an unlimited upside, but in the event of an unfavorable oute, they can do no worse than zero due to the limited liability. Riskier projects make the stocks of a firm more valuable, while make the debts of a firm less valuable. Firms with debt has an incentive to take on unnecessary risk, substituting riskier investment projects for less risky projects. The Case of Unistar  Unistar plans to manufacture memory chips. There are two designs for the production process (process 1 and process 2) both of which cost $70 million initial investment. The projects have different payoffs depending on whether the state of the economy is favorable or unfavorable. The two states of the economy are equally likely to occur. Assume the investors are risk neutral and the risk free rate is zero. The firm uses debt to finance $40 million of the $70 million initial investment and internal cash flow to finance the remaining $30 million. Cash Flow if State of the Economy Is Unfavorable (p = ) Favorable (1 p = ) Expected Value Process 1 $50 million $100 million $75 million Process 2 25 million 115 million 70 million Payoffs to Equity Holders with Debt Obligation $40 Million  If the debt holders believe that process 1 will be selected, the debt is risk free and they will require a promised face value F = $40 million.  The equity value in this case is as the above table. Process 2, which has a lower NPV is more attractive because with the option to default, shareholders prefer higher volatility in the assets. “Process 1, (40, 40)” does not constitute an equilibrium. Cash Flow if State of the Economy Is Unfavorable (p = ) Favorable (1 p = ) Expected Value Process 1 $10 million $60 million $35 million Process 2 0 million 75 million million How Do Debt Holders Respond  Rational and sophisticated debt holders should understand the incentives of shareholders. They know that shareholders will select process 2 and they will receive $ (= 25* in bad state + 40* in good state) million.  Debt holders are willing to provide only $ million, and shareholders have to invest $ million to finance the project.  In this case shareholders will choose the zero NPV project, process 2 (process 1 is a negative NPV to shareholders in this case). “Process 2, (, 40)” is an equilibrium. Unistar is not able to take the high NPV low risk project 1. The shareholders are even unable to gain from the low NPV high risk project 2. Cost of Risky Debt and Bonding Activity  With sophisticated debt holders, equity holders must bear the costs that arise because of their asset substitution incentive. The loss of positive NPV could be viewed as the cost of risky debt.  If equity holders would able to mit to taking process 1, debt holders would be willing to contribute $40 million for the $40 million obligation. Equity holders would then need to put up only the remaining $30 million and receive a $5 (=35 30) million positive NPV.  One specific example is the monitoring. If there is a monitoring technology which incurs a cost of m ( 5) million to make shareholders mit to process 1, shareholders would be willing to pay to be monitored. This is called bonding activity. The Effect of Internal Funds  In the Unistar case, shareholders contribute $30 million internal funds and raise $40 million external debt to finance the project.  If the shareholders have $15 million more internal funds, they can contribute $45 million and borrow only $25 million.  To debt holder, whichever process is chosen, they will receive $25 million with certainty. Thus they will require $25 million face value.  To shareholders, process 1。