Case Name :      Sleepless in L.A.

Authors :           Walid Busaba, Zeigham Khokher, Elliott Weinstein

Source :             Ivey Publishing

Case ID :            905N11

Discipline :        Finance

Case Length :    06 pages

Solution Sample availability : YES

Plagiarism : NO (100% Original work)

A first year business school student has obtained a summer job as an analyst at a top investment bank in Los Angeles, California. His first assignment was the pricing of MicroComp’s junk-bonds in the market place. Looking at the market value balance sheets, it was very clear that MicroComp was in financial distress. MicroComp’s dept totaled $150 million, while the market value of its assets were $80 million. If MicroComp was required to repay its debt immediately, it would be forced into bankruptcy. Clearly, MicroComp was in “effective” default, why did its market capitalization remain at $5 million? Why had it not fallen to zero? Students will use option theory to answer these questions.