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# Stulz Chapter 3 - Debt Overhang

#### trabala38

##### Active Member
Hello !

While reviewing Stulz Chapter 3 - Debut Overhang, a concept does not seem clear to me : the computation of the "existing diluted equity value".

In the Excel file 2011.T1.a.2.xlx, the "Existing Equity DILUTED to $23,571". The computation behind is : Existing Equity DILUTED = Value of Equity (without new project) - (5 - Increase in Equity Value) My question concerns the input value$5. I guess it is related the the investment of $5 which will produce a cashflow of$10. But, it makes me wonder. Stulz states in his text "Since the new shareholders must receive $5 million worth of claims against the firm". => My question : how can shareholders have the "right" to claim$5million ? Also, the fact that the project is certain, thus, the fact that it will yield $10million of cashflow, makes me wonder why$5 was substracted instead of \$10 (see the formula above)... Basically, I don't understand precisely how to segregate the old from the new shareholders.

Thanks a lot for your replies !

Regards,

trabala38