Gator Software has just completed an R&D project that had required borrowing with a face value of $70 million in senior debt from a bank. This R&D effort has resulted in an investment opportunity that will cost an additional $100 million and will result in a cash flow of $90 million with probability 0.5 and $210 million with probability 0.5. The firm has no cash on hand and no other assets except for this investment opportunity. Assume zero discount rate, no direct bankruptcy costs, and no taxes.

Note: We analyzed two debt overhang exercises in class. Similar to the second one (and unlike the first one), the eventual firm payoff is not known with certainty here at the time the project is financed. In other words, at the time of the new security issue all parties expect future cash flows to be $90 million with probability 0.5 and $210 million with probability 0.5.

In answering the questions below, assume that the new security that the firm attempts to issue is to be sold to an investor other than the bank that originally lent to the firm.

(a) Can the firm fund the investment opportunity with an equity issue?

(b) Can the firm fund the investment opportunity with an issue of junior debt?

(c) Can the firm fund the investment opportunity with a sale of senior debt to a new investor with a promised repayment of $120 million? (Here, assume that this is allowed in the existing bank loan agreement, and that the new debt will have the same seniority as the old debt in bankruptcy).