Company $6$ has undertaken a portfolio of investment with different risks. The market expects that its value will be $$600m,$$$400,$ or $$200m$ with $30\%,40\%$ and $30\%$ respectively. However, the CEO of Company $6$ knows that the intrinsic value should be $$700m,$$$480,$ or $$350m$ with $30\%,40\%$ and $30\%$ respectively.

Currently Company $6$ is financed entirelywith equity. The CEO is planning to issue debt to replace equity. In the event of financialdistress, Company $6$ will lose $$100m.$ Assume that the market is adhering to the semi$-$strong form efficiency and there is no tax.

$($a$)$ Suppose that Company $6$ would issue a debt with a face value of $$200$

Determine the value of Company $6$ if

$(2$ marks

$($i$)$ the market's valuation is correct

$(2$ marks

$($ii$)$ the CEO's valuation is correct

$($b$)$ Suppose now that Company $6$ would issue a debt with a face value of $$450.$

Determine the value of Company $6$ if

$($i$)$ the market's valuation is correct

$($ii$)$ the CEO's valuation is correct

$(2$ mark

$(2$ marl

$($c$)$ Comparing the answers to $($a$)$ and $($b$),$ which face value of debt would be mo effective to signal the true intrinsic value of Company $6?$ Explain.

$(5$ ma

d$)$ What conditions must hold for debt being an effective signal?

Explain the pecking order theory.

Total $25$