A firm went through a di cult period. It has no ongoing projects, assets in place or cash, and has a debt repayment of 100 due next year. The company has an investment opportunity, which for an investment of 100 will produce a cash flow of 150 next year.

(a) Assume just in this question that the firm had 100 in cash to finance the project. What would have been the value of equity and debt in this case?

(b) Given your answer to (a); but not assuming that 100 cash is available, can the firm issue new equity to finance the project? Can the firm raise 100 by issuing new debt, junior in repayment priority to existing debt? Explain.

(c) Describe several possible financing solutions that would allow the firm to undertake the project? What is the maximum amount existing debt holders can receive under any of them? Explain.