Given: XYZs assets are currently worth $1.7 Billion and that the risk-free rate is 10% Percentage per annum [annual compounding; a year from now, the value of XYZ assets will be either worth $2.2 Billion or $1.6 B. XYZ issued some time ago a zero-coupon bond with face value of $2 Billion; the bond matures exactly one year from now. XYZ Corp. has an opportunity to invest $100 Million into a project with a certain PV of $200 Million. Should investment be made, the value of XYZ assets next year will be either $2.42 Billion or $1.82 Billion;

Q.2.1 (15 points) Calculate the value of XYZ equity before and after the additional investment of $100 Million. How will be divided the $100 Million NPV gain between the bondholders and stockholders? Who will agree to provide this additional $100 Million, stockholders or bondholders? Explain.

Q.2.2 (15 points) Bondholders refuse to provide the whole $100 Million financing and ask the stockholders to contribute too. But the XYZ Corp. threatens to change firms business activity (should the bondholders refuse to provide the whole $100 Million financing ), so that the value of XYZ assets next year will be either $3Billion or $1Billion and value of assets today will become $1.2 Billion. Would the stockholders benefit from this change? Will the bondholders add $100 Million of new money to prevent management from acting on this threat?