A firm has 3 classes of debt: senior, junior1 and junior2. According to the debt...
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A firm has 3 classes of debt: senior, junior1 and junior2. According to the debt covenants, in case of bankruptcy, junior1 and junior2 divide the value available in the ratio of 3:2 ($3 out of every $5 goes to junior1 etc.) after senior debt has been paid. The outstanding amount of senior debt is $1,600,000. The firm goes bankrupt and its assets sell for $4,900,000. How much does junior2 debt receive? (Assume Modigliani-Miller holds, that is there are no transaction costs etc.)
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