A public firm is facing financial distress. The firm has a £20 million loan due at the end of the year. The company’s assets currently have a market value of only £15 million including £2 million in cash.

The firm is considering two possible alternative uses for this cash. One possibility is to pay the £2 million out to shareholders in the form of a special cash dividend at the end of the year. The second possibility is to invest the £2 million into a project that offers a £4 million cash inflow at the end of the year.

Which alternative would equity holders prefer, and which alternative would debt holders prefer? Explain your answer