Finance Theory (15.402) – Spring 2003 – Dirk Jenter 13 Proof 1 Firm As equity gets all cash flows Firm Bs cash flows are split between its debt and eq
{"Image DocumentName": "Proof 1 \u2027Firm A\u2019s equity gets all cash flows", "Image ImageDescription": "\u2027 Firm B\u2019s cash flows are split between its debt and equity with debt being senior to equity. \u2027 In all (i.e., both) states of the world, the following are equal: \u2192 The payoff to Firm A\u2019s equity. \u2192 The sum of payoffs to Firm B\u2019s debt and equity. \u2027 By value additivity , D(B) + E(B) = E(A) Q.E.D. Claim\u2019s value next year: Firm A\u2019s Equity. Firm B\u2019s Debt. Firm B\u2019s Equity. In state 1: In state 2: 40.", "Image XResolution": "37", "Image YResolution": "37", "Image ResolutionUnit": "Pixels/Centimeter", "Image Software": "SlidePlayer", "Image YCbCrPositioning": "Centered"}