Taggart Transcontinental has a value of $500 million if it continues to operate, but has outstanding debt of $600 million. If Taggart declares bankruptcy, bankruptcy costs will equal $50 million, and the remaining $450 million will go to creditors. Instead of declaring bankruptcy, Taggart proposes to exchange the firm's debt for a fraction of its equity in a workout. The minimum fraction of the

firm's equity that Taggart would need to offer to its creditors for the workout to be successful is closest to:

A) 50%
B) 75%
C) 83%
D) 90%

D
Explanation: D) Debt holders will need to be at least as well off as if the firm went into liquidation. In liquidation the debt holders would receive $450 million, however if the firm continues to operate it will have a value of $500 million. Therefore, $450 million = percent ownership for debt holders × $500 total value.
Solving for percent ownership gives $450/$500 = 90%