Baxter Inc is facing a financial distress. Baxter has a loan of $1 million due at the end of the year. Without a change in its strategy, the market value of its assets will be only $800,000 at that time, and Baxter will default on its debt. Baxter is considering a new strategy.

The new strategy requires no upfront investment, but it has only a 50% chance of success. If the new strategy succeeds, it will increase the value of the firms asset to $1.5 million. If the new strategy fails, the value of the firms assets will fall to $500,000.

1. Would shareholders of Baxter be interested in pursuing the strategy? Explain, provide necessary calculations.
2. Would debtholders of Baxter be interested in pursuing the strategy? Explain, provide necessary calculations.
3. If chance of success of the strategy were only 1% would shareholders be interested in the strategy. Explain.