3. Suppose a firm has senior debt with a face value of $150. With its assets in place, the firm has a 50% chance of generating $200, and a 50% chance of generating $100.

If the manager spends $20 to refurbish the firm's assets, then the firm will have a 50% chance of generating $230, and a 50% chance of generating $130.

If the manager wants to maximize the equityholders' expected payoff, then he will optimally choose to refurbish the assets; he will fund this investment by issuing additional senior debt to raise $20. In particular, he will issue this new senior debt to the existing senior debtholders. Assuming senior debtholders have a required expected net rate of return of 0%, what should the manager optimally choose as the face value of this new senior debt issuance? (20 points)

(Hint: The face value of this new senior debt will be less than $20 because senior debtholders care about the new senior debt AND the old senior debt!)

Face value of new senior debt issue =