Buckeye Industries has a bond issue with a face value of $1,000 that is coming due in one year. The value of Buckeye’s assets is currently $1,090. Urban Meyer, the CEO, believes that the assets in the firm will be worth either $920 or $1,380 in a year. The going rate on one-year T-bills is 4.8 percent.
What is the value of Buckeye’s equity? The value of the debt?
Suppose Buckeye can reconfigure its existing assets in such a way that the value in a year will be $800 or $1,600. If the current value of the assets is unchanged, will the stockholders favor such a move? Why or why not?