Suppose Tefco Corp. has a value of $118 million if it continues to operate, but

Question

Suppose Tefco Corp. has a value of $118 million if it continues to operate, but has outstanding debt of$145 million that is now due. If the firm declares bankruptcy, bankruptcy costs will equal $18 million, and the remaining $100 million will go to creditors. Instead of declaring bankruptcy, management proposes to exchange the fmn's debt for a fraction of its equity in a workout. What is the minimum fraction of the firm's equity that management would need to offer to creditors for the workout to be successful?

Tefco could offer its creditors ___% of the firm in a workout. (Round to one decimal place.)

Explanation / Answer

Answer:

Creditors receive $100 million in bankruptcy, so they need to receive at least this much. Therefore, Tefco could offer its creditors $100/$120 x 100 % = 83.33% of the firm in a workout

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