Reference no: EM1351967
1. Baruk Industries has no cash and a debt obligation of $36 million that is now due. The market value of Baruk's assets is $81 million, and the firm has no other liabilities. Assume perfect capital markets.
a) Suppose Baruk has 10 million shares outstanding, What is Baruk's current share price?
b) How many new shares must Baruk issue to raise the capital needed to pay its debt obligation?
c) After repaying the debt, what will Baruk's share price be?
2. You have received two job offers. Firm A offers to pay you $85,000 per yer for two years. Firm B offers to pay you $90,000 for two years. Both jobs are equivalent. Suppose that firm A's contract is certain, but that firm B has a 50% chance of going bankrupt at the end of the year. In that event, it will cancel your contract and pay you the lowest amount possible for you to not quit. If you did quit, you expect you could find a new job paying $85,000 per year, but you would be unemployed for 3 months while you search for it.
a) Say you took the job at firm B, what is the least firm B can pay you next year in order to match what you would earn if you quit?
b) Given your answer to part (b), and assuming your cost of capital is 5%, which offer pays you a higher present value of your expected wage?
c) Based on this example, discuss one reason why firms with a higher risk of bankruptcy may need to offer higher wages to attract employees.