OU Inc. is facing financial distress. There is a 40% chance that the firms assets will be worth $15 million and a 60% chance that the assets are going to be worth $100 million next year. The firm also has a debt claim on outstanding with a face value of $45 million due next year. The cost of equity and debt capital is equal to 10%. OU Inc. is facing an investment opportunity that requires $20 million upfront and will result in a safe cash flow of $25 million next year. The firm has no internal funds available to finance the project.

A) Will OU Inc.s shareholders inject new equity to finance this project? Why?

B) Suppose OU Inc. proposes a deal to its creditors. The creditors are asked to write down $10 million in debt face value to $35 million, and shareholders will have to inject new equity to fund the project. Will shareholders agree? Will creditors agree? Why?

C) What is the minimum amount of debt forgiveness required to make both shareholders and creditors agree and fund the investment project?

D) What is the alternative method of debt restructuring (i.e., forgiveness of a proportion of debt face value), to overcome the debt overhang underinvestment problem?

PLEASE SHOW ALL WORK