7. (Debt Overhang-the Under-Investment Problem) Consider a firm that currently has debt with face value of $1,000 that will come due in one year and assets that are projected to be worth $900 in one year. Suppose the firm has the opportunity to invest in a new project requiring an immediate investment of $100 and offering an expected return of 50% in one year ppose the only way to get the $100 for the initial investment is for the existing equity holders to contribute it Assume the required rate of return for this project is less than 50%, should the manager oal is to maximize firm value? (Think expected rate of return vs invest in the project if her g required rate of return, and what it says about the NPV) (i) Calculate the value of the firm, the debt and equity (1) without the new project and (2) with the new project assumeondscontrate) Equity Existing Assets 900 Debt 900 900 Fayoff 900 Value (Discounted expected payoffs) Existing New Assets Project Assets Total DebtEquity Payoff Value (Discounted expected payo (ii) Will the manager invest in the project if her goal is to maximize shareholders' value? (HINT remember that the shareholders had to inject $100 to finance the project, thus the manager considers the value of the equity with the new project minus the required investment and compares it to the value of the equity without the new project)