2. You own debt with face amount of $160 Million that you lent to a firm managed by its sole shareholder, whose firm is expected to generate next year either a cash flow of $200 Million or $100 Million - with probabilities .75 and .25, respectively. This is a one-time, one year project and then the firm will be shut down. In addition there is a project P that will generate guaranteed cash flow of $60 Million in one year. This new project requires funding of $50 Million which the firm does not have, and so say he would have to issue junior debt to obtain the capital to undertake the project due to the covenants in your debt security. Assume that all cash flows are discounted at 0%.

a) Do you expect the manager to undertake the new project P? Explain how he would acquire the capital - in other words, what is the face value for the new junior debt. (The existing debt had a pari passu covenant it turns out)?

b) The manager asks you to forgive $40 million in debt down to a new face value of $120 million. Again calculate what the face value would need to be for the junior debt and determine if the manager will now undertake the project with this restructuring plan.

c) Would you expect all parties to agree to the restructuring in part (b)?

d) The owner of the firm makes another suggestion to you where you do not have to forgive any debt as in part (b). Instead he asks you to make the $50 million investment in the Junior Debt needed. Determine the Face Value of the Junior Debt that you would own so that the surplus of the restructuring is evenly split between you and the owner.