Debt Overhang: III
•Bondholders’
return = -8.57%; exp. equity payoff = $500; total return = 7.14%. Bond buyers will have
to demand higher yields to account for the possibility that stockholders will turn down
desirable projects in the future. This might make initial project unprofitable as
well; need
31.43% stated return on bonds and only $200 for stockholders to obtain even 0%
return for
bondholders.