Answer:
expected bankruptcy costs = $190000
Explanation:
given data
face value = $4 million
equity = $18.6 million
stock outstanding = 510000 shares
sell price = $31 per share
corporate tax rate = 35 percent
to find out
decrease in the value of the company due to expected bankruptcy costs
solution
we get here value of levered firmed by M & M proportion
value of levered firm = value of equity + value of debit
value of levered firm = $18.6 million + 35% ( $4 million)
value of levered firm = $20 million
and
now we get total market value of firm that is
total market value of firm = market value of equity + market value of debit
total market value of firm = $31 ( 510000 ) + $4 million
total market value of firm = $19810000
so expected bankruptcy costs are here as
expected bankruptcy costs = $20 million - $19810000
expected bankruptcy costs = $190000
