Question
A firm has debt with a face value of $100. Its projects will pay a safe $80 tomorrow. Managers care only about shareholders. A new
A firm has debt with a face value of $100. Its projects will pay a safe $80 tomorrow. Managers care only about shareholders. A new quickie project comes along that costs $20, earns either $10 or $40 with equal probabilities, and does so by tomorrow. Assume that the time value of money is 0
1. Is this a positive-NPV project?
2. If the new project can only be financed with a new equity issue, would the shareholders vote for this? Would the creditors?
3. Assume the existing bond contract was written in a way that allows the new projects to be financed with first collateral (superseniority with respect to the existing creditors). New creditors can collect $20 from what the existing projects will surely pay. Would the existing creditors be better off?
4. What is the better arrangement from a firm-value perspective?
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Gold And Debt An American Hand Book Of Finance With Over Eighty Tables And Diagrams Illustrative Of The Following Subjects The Dollar And Other Units Paper Money In The United States And Europe Gold And Silver In The United States And Europe
Authors: Fawcett William Lyman
1st Edition
1313124508, 9781313124508
