申論題

3.(10 points) The equity in a firm is a residual claim, i.e., equity holders lay claim to all cashflows left over after other financial claim-holders (debt, preferred stock ctc,) have been satisfied. Ifa firm is liquidated, the same principle applies, with equity investors receiving whatever is left over in the firm atter all outstanding debts and other financial claims are paid off. The principle of limited liability, however, protects equity investors in publicly traded firms if the value of the firm is less than the valuc of the outstanding debt, and they cannot lose more than their investment in the firm.

(3) (1.5 point) The payoff to equity investors, on liquidation, can therefore be written as: Payoff

where, V = Value of the firm
 D = Face Value of the outstanding debt and other external
 Piease draw a figure of the payoff to debt investors (Y-axis) and the firm value (X-axis)