A firm$$s productive assets will be worth either $$100$ million in a good state or $$10$ million in a bad state with equal probability. Additionally, the firm has $$15$ million in cash, which it could pay out as a dividend, and outstanding debt with a face value of $$35$ million due next year. The firm also has a project which would require an investment of $$15$ million this year and produce $$22$ million with certainty regardless

of the state of the world. Assume risk neutrality and a $10\%$ cost of capital.

a$.$ Do stockholders choose to take this positive NPV project? What is the present value of the creditors payoff?

b$.$ Suppose creditors suggest to financially restructure by reducing the face value of debt to $24$ if the shareholders promise to use the $$15$ million to invest. Will the shareholders agree? Will the creditors prefer to do this?