Consider Baxter, Inc., which is facing 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 $900,000 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 assets by $400,000 (i.e. to $1.3 million

If the new strategy fails, the value of the firms assets will fall by $500,000 (i.e., to $300,000).

Compare the value of the firm, the debt and equity (i) without a change to strategy and (ii) with a change to strategy (assume 0% discount rate). Will the manager invest in the project, if her goal is to maximize shareholders value?