Firm: WESCO International

Debt Contracts

• Your Firm is taking on a new set of projects. They plan on taking on additional debt (PV of X) of $90 million with a 10-year maturity. The present value of the projects future cash inflows is expected to be $120 million and the standard deviation is 20%. Assume the day after the firm issues the debt contract another project comes along. This project will cost an additional $9.6 million, increase the present value of the projects future cash inflows by $10 million dollars, and reduce the risk of the project. The new standard deviation will be 10%.

Note that no calculations are required for the questions below. They can all be answered conceptually. You do have the tools to solve for this problem and it similar to one of the examples given if you would still like to do the calculations.

• How will this change the present value of debt with default risk and the value of equity with and without option pricing?
• What type of debt problem has this created?
  • What are some potential solutions to this problem?
  • Describe the potential solutions debtholders of your firm could use to prevent this problem. Describe how the solution to this problem would change the value per share.