Given: XYZs assets are currently worth $1.7B 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 be worth $2.2 B or $1.6 B. XYZ issued some time ago a zero-coupon bond with face value of $2B; the bond matures exactly one year from now. XYZ Corp. has an opportunity to invest $100MM into a project with a certain PV of $200 MM. Should investment be made, the value of XYZ assets next year will be either $2.42B or $1.82B;

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

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