Debt Overhang: II
100
2700
0
1000
Stockholders’ claim
4000
4000
2400
4000
Bondholders’ claim
4100
6700
2400
5000
Firm Cashflows
Recession
Boom
Recession
Boom
Firm W/ Proj
Firm W/o Proj
Stockholders have on av. $500 without the project, and $400 with the project [(2700+100)/2 – 1000]. The new project will not be undertaken.