Moon Inc is currently investing in a one period project, generating 120 and 60 with equal chance The face value of corporate bond is 80 There are 10 shares outstanding in total solely owned by Mr Sun Due to some health issue, Mr Sun has to appoint Ms Earth as the CEO to run the company, who owns zero shares and she earns 20 base salary and 25 percent of positive operating profits as her bonus Assume that a Salary is paid Before debt payment b The bonus is paid when the company is solvent c There s no time discount d All investors and the manager are risk neutral If there is a project replacement opportunity available with payoff 180 with 1 4 probability 80 with 1 2 probability and 16 with 1 4 chance, will Ms Earth switch to the new project Now assume that one day before the replacement decision to be made, M Earth resigns without any pamnt and Mr Sun recovers and decides to fire Ms Earth and to make his own decision What is Mr Suns choice What will the stock price be Now assuming that after the replacement decision, there's another investment opportunity available which requires 30 investment outlay and generates 36 without uncertainty Due to some covenants, Mr Sun can only raise money via equity financing Will this project be taken If Mr Sun could negotiate with his bond holders To guarantee that the project will be taken, and that Mr Sun will get the maximun value possible, what's the new face value of bond after negotiation

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Posted on May 17, 2024

Moon Inc is currently investing in a one period project, generating 120 and 60 with equal chance. The face value of corporate bond is 80.

Moon Inc is currently investing in a one period project, generating 120 and 60 with equal chance. The face value of corporate bond is 80. There are 10 shares outstanding in total solely owned by Mr Sun. Due to some health issue, Mr Sun has to appoint Ms Earth as the CEO to run the company, who owns zero shares and she earns 20 base salary and 25 percent of positive operating profits as her bonus

Assume that

a. Salary is paid Before debt payment

b. The bonus is paid when the company is solvent

c. There s no time discount

d. All investors and the manager are risk neutral

If there is a project replacement opportunity available with payoff 180 with 1/4 probability 80 with 1/2 probability and 16 with 1/4 chance, will Ms Earth switch to the new project?
Now assume that one day before the replacement decision to be made, M. Earth resigns without any pamnt and Mr.Sun recovers and decides to fire Ms. Earth and to make his own decision.What is Mr Suns choice? What will the stock price be?
Now assuming that after the replacement decision, there's another investment opportunity available which requires 30 investment outlay and generates 36 without uncertainty. Due to some covenants, Mr. Sun can only raise money via equity financing. Will this project be taken?
If Mr. Sun could negotiate with his bond holders. To guarantee that the project will be taken, and that Mr. Sun will get the maximun value possible, what's the new face value of bond after negotiation?