Value of the company due to expected bankruptcy costs

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Reference no: EM132036547

Dream, Inc., has debt outstanding with a face value of $6 million. The value of the firm if it were entirely financed by equity would be $17.85 million. The company also has 350,000 shares of stock outstanding that sell at a price of $38 per share. The corporate tax rate is 35 percent. What is the decrease in the value of the company due to expected bankruptcy costs? (Assume that the market value of the debt is the same as the face value of the debt, because the debt has just been issued at today’s market interest rate, that the debt is perpetual, and that in this economy corporate taxes as well as financial distress costs exist.)

Reference no: EM132036547

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