Consider a two-period setting, year 0 and 1. All investors are risk-neutral and the risk-free rate is 0. By year 0, Bond Ryder (BR) has suffered a series of negative shocks and is faced with a grim situation. It has debt outstanding of face value $45 million which is due next year (year 1). Next year, its assets in place have the following prospects. Assume no corporate taxes. BRs assets yield the following payoffs in year 1:

State	Probability	Payoff (year)
Good	0.5	100
Bad	0.5	25

(a -- 1 point) What is the payoff to debt and equity holders next year in the good state?

(i) Debt

(ii) Equity

(b -- 1 point) What is the payoff to debt and equity holders next year in the bad state?

(i) Debt

(ii) Equity

(c -- 1 point) What are the present values of BRs current debt and equity?

(i) Debt

(ii) Equity

(d -- 3 points) BR now discovers a new project that would require a new investment of $7 million in year 0 and yield an expected payoff $8 million in year 1. Suppose that the new investment is financed by equity holders.

(i -- 1 point) What is the NPV of this project?

(ii -- 0.5 points) What is the year-1 payoff to the existing debt and equity holders in the good state if the new project is taken?

(A) Existing Debt

(B) Existing Equity

(iii -- 0.5 points) What is the year-1 payoff to the existing debt and equity holders in the bad state if the new project is taken?

(A) Existing Debt

(B) Existing Equity

(iv -- 0.5 points) What is the new value of debt and equity if the new project is taken (taking into account the new investment the equity holders need to provide)?

(A) Debt

(B) Equity

(v -- 0.5 points) What is the NPV of this new project to shareholders?

(e -- 4 points) Suppose the project can be financed by issuing new debt more senior to the existing debt.

(i -- 1 point) What is the year-1 payoff to the new debt holders, existing debt holders and equity holders in the good state?

(A) Existing Debt

(B) New Debt

(C) Existing Equity

(ii -- 1 point) What is the year-1 payoff to the new debt holders, existing debt holders and equity holders in the down state?

(A) Existing Debt

(B) New Debt

(C) Existing Equity

(iii -- 1 point) What is the current value of the new debt, the existing debt and equity under this financing strategy?

(A) Existing Debt

(B) New Debt

(C) Existing Equity

(iv -- 1 point) What is the NPV of the new project for shareholders?