The unlevered firm value is $10,346 million. To this we
shouldaddtheexpectedtaxbenefitsofdebt.Sincethefirmis
losing money and has substantial netoperating losses, the
expectedtax benefits accrue almost entirelyafter year 10.
Consequently,wediscounttheexpectedtaxbenefitsback 10
years at 7.81 percent.
23 To estimate the bankruptcy cost, we consider the
difference between the going concern value of $10,346
million and the distress sale proceeds estimate of $2,180
million(estimatedinIllustration17.2)asthebankruptcycost.
Multiplyingthisbytheprobabilityofbankruptcyestimatedin
Illustration 17.1 yields the expected cost of bankruptcy:
Adding back the cash and marketable securities and
subtracting debt yields a value of equity for Global Crossing: