Question

Market Value of Assets = $210 million; Payment to Senior Secured = $80 million; Remaining asset after payment to senior secured = 210 - 80 = $130 million; Payment to Senior Unsecured = $120 million; Remaining asset after payment to senior unsecured = 130 - 120 = $10 million; Since remaining asset is only $10 million, this goes to Subordinated. Only if any funds remain from liquidation of asset, it will go to preferred equity holders and the last recipients are the common shareholders. This is the reason why cost of equity is high and cost of senior secured debt is the lowest. 2. In the US, “Face Value” = $________.

Answer 1

Senior Secured lenders are first in the pecking order. They are the first one to get paid from the proceeds from sale of the secured assets. Their risk is therefore considerably lower and hence their return or reward is also lower. Hence, the cost of senior secured debt is the lowest.

Common equity holder are the last one in the pecking order. They get paid from the residual cash flows left after everyone else had been paid over. Thus equity position bears the highest risk and hence the reward or return has to incorporate the premium for the additional risk. Hence, the cost of equity is high.

In the US, “Face Value” = $ 1,000

Please fill 1,000 in the blank.