18 Thetaxrateinyear 10 islessthan 35 percentbecauseof
thenet operating lossescarried forward from theprevious
year.
19 Toestimatethemarketvalue,wediscountedthefacevalue
ofdebtandtheinterestpaymentsbackattheestimatedpretax
cost of debt of 12.80 percent.
20 TheBlack-Scholesmodelwasusedtoestimatethevalueof
the options outstanding. In fact, these options had lost a
substantialportionofvaluebecauseofthedropinthestock
price.
21 H.AlmeidaandT.Philippon,“TheRisk-AdjustedCostof
Financial Distress,” SSRN working paper, 2005.
22 Weusedtheunleveredbetaoftelecomservicesfirmsasthe
unlevered beta for Global Crossing.
23 The tax benefits will accrue after year 10, and the
unlevered cost of equity of 7.81% is used as the discount rate.
24 Weconsideredonlyfirmswithpositiveoperatingincome
andlowdebt-to-capitalratios(lessthan 30 percent)ashealthy
firms.
25 Technically,thiscanbedonebyputtingthefirmintostable
growth and valuing it as a stable-growth firm, where
reinvestmentsareusedtoeitherpreserveoraugmentexisting
assets.
26 Thisisanextensionofthevarianceformulaforatwo-asset
portfolio.