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Firm A should pay back $1Mil of senior debts next year. The firm does not have any valuable assets now (i.e., zero liquidation value), but
Firm A should pay back $1Mil of senior debts next year. The firm does not have any valuable assets now (i.e., zero liquidation value), but it has a good investment opportunity. If it invests in the project by $1Mil now, it will get $1.8Mil next year with certainty. Given the current interest rate, the project has positive NPV. The CFO argues, We can issue junior debts to finance this positive NPV project. Do agree with the CFO?
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