PPT Slide
Strategic debt service may account for 30% to 40% of the premium on
risky debt. Models are constructed to examine the effect on valuation
of expanding the strategy space open to equity holders.
• Risk premium prior to bankruptcy may be significantly boosted by
expectation of deviations from absolute priority.
• Debtholders in distressed firms are persuaded to accept concessions.
Indirect bankruptcy costs are the unmeasurable opportunity costs
1. Lost sales and a decline in the inventory value.
2. Increased operating costs.
3. Reduction in the firm’s competitiveness.