A firm is valued at $1,000,000, and a zero-coupon bond with a $1,200,000 face value is the only debt issued by the firm. Calculate the value of the firm’s equity. A. $0. B. −$200,000. C. $200,000. D. $1,000,000.
Equity claimants receive the difference between firm value (VT) and the face value of the bond (F) if firm value exceeds bond value. If bond value exceeds firm value, equity claimants receive nothing. The payoff on equity (ST) is therefore:
