Problem 3. Agency costs of debt (25 points) Don't panic during the diving. Chapter 2. Recall a water sport company "Don't panic" (DP) from the fall mock exam. Since October, the company managed to start a new diving project successfully. However due to the negative effect of COVID-19 financial forecast was updated - below there is a summary: Parameter Expected CFO Initial view (October 2020) 6 mio with prob=70% 2 mio with prob=30% Update (December 2020) 7,4 mio with prob=50% 3,4 mio with prob=50% Investors are still risk-neutral and the appropriate discount rate is zero. 3.1. Let's suppose that in parallel DP shareholders negotiate to dispose the company's shares to the private equity division of a well-established cash-rich banking group which virtually may write-off all the DP's debt. What may be the values of DP's assets and equity after the M&A? (2 points) 3.2. If the acquisition fails, the shareholders of DP are going to ask the lenders for a complex restructuring on the following terms: Loan portfolio Senior secured facility (Large Lender) Current terms Payable in 1 year with FV=4,5 mio Request for a restructuring 2,0 mio are written-off against 30% of DP's share capital 2,5 - payable in 1 year Mezzanine Payable in 1 year All the debt is written-off against subordinated debt 1,5714 mio only in a 20% in share capital (Gelo Capital) good state Describe carefully all the cash flows and find the value of equity to initial shareholders. Comment on possible problems, which may arise in the corporate governance (7 points) Problem 3. Agency costs of debt (25 points) Don't panic during the diving. Chapter 2. Recall a water sport company "Don't panic" (DP) from the fall mock exam. Since October, the company managed to start a new diving project successfully. However due to the negative effect of COVID-19 financial forecast was updated - below there is a summary: Parameter Expected CFO Initial view (October 2020) 6 mio with prob=70% 2 mio with prob=30% Update (December 2020) 7,4 mio with prob=50% 3,4 mio with prob=50% Investors are still risk-neutral and the appropriate discount rate is zero. 3.1. Let's suppose that in parallel DP shareholders negotiate to dispose the company's shares to the private equity division of a well-established cash-rich banking group which virtually may write-off all the DP's debt. What may be the values of DP's assets and equity after the M&A? (2 points) 3.2. If the acquisition fails, the shareholders of DP are going to ask the lenders for a complex restructuring on the following terms: Loan portfolio Senior secured facility (Large Lender) Current terms Payable in 1 year with FV=4,5 mio Request for a restructuring 2,0 mio are written-off against 30% of DP's share capital 2,5 - payable in 1 year Mezzanine Payable in 1 year All the debt is written-off against subordinated debt 1,5714 mio only in a 20% in share capital (Gelo Capital) good state Describe carefully all the cash flows and find the value of equity to initial shareholders. Comment on possible problems, which may arise in the corporate governance (7 points)
