1. The York Finance Corporation will sell its assets for $200 at year-end. The f
ID: 1142043 • Letter: 1
Question
1. The York Finance Corporation will sell its assets for $200 at year-end. The
firm has promised to pay the Sun York Insurance company $300 at that time.
How much will the shareholders will get?
2.The York Finance Corporation will sell its assets for $200 at year-end. Thefirm has promised to pay the insurance company $200 at that time. How
much will the shareholders will get?
3. Suppose at year-end the York Finance Corporation’s value is $50. The firm
has promised to pay the Sun York Insurance Group $100. How much will the
debtholders will get?
4. Now suppose the York Finance Corporation’s value is $200 at year-end and
the debtholders are promised $150. How much will the debtholders get?
Explanation / Answer
(1) Shareholders will get nothing.
Shareholders are residual stakeholders in a company and will get any share of profit after all creditors have been repaid. Value of debt being higher than asset value ($300 > $200), full debt settlement will not be done, so shareholders will not be paid.
(2) Shareholders will get nothing.
As explained above, value of debt being equal to asset value ($200), full debt settlement will be done first, so shareholders will not be paid.
(3) Debtholders will get $50.
Since firm value is lower than value of promised debt repayment ($50 < $100), debtholders will get $50 only.
(4) Debtholders will get $150.
Since firm value is higher than value of promised debt repayment ($200 > $150), debtholders will get $150.
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