11 9. Suppose company Z is facing a financial distress. In other words, unless it fully meets the obligation to debt holders for the payment of coupon and principle amount, the company will default on its debt. The current value of the firm is $200,000. However, on next year, the firm needs to repay the loan amount $250,000, which also includes the interest amount. If no other actions are implemented, the company will default. Now, the company grasps an attractive investment opportunity. The up-front cost is $60,000 and generate the cash return $100,000 with 100% certainty. che (c) (2.5 points) Calculate the expected return for the equity. Are the shareholders willing to provide financing for this project? Is this phenomena related to asset substitution problem or debt overhang problem? (d) (2.5 points) The extension of the issue in this question is related to the leverage ratchet effect. State the leverage ratchet effect. 11 9. Suppose company Z is facing a financial distress. In other words, unless it fully meets the obligation to debt holders for the payment of coupon and principle amount, the company will default on its debt. The current value of the firm is $200,000. However, on next year, the firm needs to repay the loan amount $250,000, which also includes the interest amount. If no other actions are implemented, the company will default. Now, the company grasps an attractive investment opportunity. The up-front cost is $60,000 and generate the cash return $100,000 with 100% certainty. che (c) (2.5 points) Calculate the expected return for the equity. Are the shareholders willing to provide financing for this project? Is this phenomena related to asset substitution problem or debt overhang problem? (d) (2.5 points) The extension of the issue in this question is related to the leverage ratchet effect. State the leverage ratchet effect