Consider a firm in Chapter 11. The firm has $5.5m senior debt and $7.5m junior debt. The junior & senior claim- holders debate the firm value in reorganization. One group argues that the value of the firm in reorganization is $6m, the other argues the value is $14m. (Assume the true value of the company is $8m.)
1) Which party would benefit from a valuation of $6m in a debt for equity exchange?
2) Which party would benefit from a valuation of $14m in a debt for equity exchange?
3) How much equity would junior and senior claim holders would get if the valuation of $6m or $14m is accepted?
4) Which party would be shortchanged if the $6m valuation is accepted instead of $8m?
5) Which party would be shortchanged if the $14m valuation is accepted instead of $8m?