ABSTRACT
The huge amount of debt can be a big burden in a soft economy. With debt service costs eating up a large percentage of operating income, struggling companies are eager to undertake equity for debt exchanges. An equity for debt exchange has been regarded as a pure capital structure change while the assets remain unchanged. Five possible effects arising from changes in capital structure are tax effects, wealth-transfer effects, information effects, free cash flow effects and accounting effects. The chapter shows that total equity value will increase if the specified boundary conditions are satisfied and if the agency problems exist, i.e. the investment incentives are distorted prior to the swap. The examination of whether an equity for debt swap program can increase both the shareholder and bondholder wealth is important because the program can be successfully implemented if both parties gain from it.
