QUESTION 3 (20 POINTS). 3.1. The creditors of a company which is unable to fully repay its debt must choose one of the following two options: (i) Immediate liquidation of the company, from which they would receive SEK 950. (ii) Recapitalisation and continuation of the company's activity. In this case, the company's assets would be invested in a project that would yield SEK 1 250 in one year from now, with probability 1; the shareholders would then pay SEK 1 100 to the creditors and retain the residual amount of SEK 150. (The nominal value of the company's debt is irrelevant for our present purposes.) All agents are risk-neutral and discount future payoffs at the yearly rate of 5%. Which alternative should the creditors choose, and what would be the corresponding the present value of their claims? 3.2. Suppose that if the recapitalisation plan in 3.1 were accepted, the company could engage either in the project mentioned under (ii), or in an alternative project. The cash-flow from the al- ternative project will also be realised in one year and will be equal either to SEK 1450 or to SEK 0; both outcomes have probability 3. The SEK 1 100 payment promised to the creditors would only be made if the company's cash-flow were equal to SEK 1450; otherwise, the creditors' cash-flow would be equal to 0. Suppose that the company's managers act in the shareholders' best interest; would they choose this new alternative or the project in (ii), if the company were allowed to con- tinue its activity? Which alternative should the creditors choose in this modified scenario, and what would be the optimised present value of their claims? 3.3. Considering the situation in 3.2, an expert has suggested that reducing the payment promised to the bondholders from SEK 1 100 to SEK 1000 would actually lead to an outcome such that the present value of the creditors' claims would be greater than the present value in the answer to 3.2. Is this suggestion justified? Provide all the calculations necessary to support your answer. QUESTION 3 (20 POINTS). 3.1. The creditors of a company which is unable to fully repay its debt must choose one of the following two options: (i) Immediate liquidation of the company, from which they would receive SEK 950. (ii) Recapitalisation and continuation of the company's activity. In this case, the company's assets would be invested in a project that would yield SEK 1 250 in one year from now, with probability 1; the shareholders would then pay SEK 1 100 to the creditors and retain the residual amount of SEK 150. (The nominal value of the company's debt is irrelevant for our present purposes.) All agents are risk-neutral and discount future payoffs at the yearly rate of 5%. Which alternative should the creditors choose, and what would be the corresponding the present value of their claims? 3.2. Suppose that if the recapitalisation plan in 3.1 were accepted, the company could engage either in the project mentioned under (ii), or in an alternative project. The cash-flow from the al- ternative project will also be realised in one year and will be equal either to SEK 1450 or to SEK 0; both outcomes have probability 3. The SEK 1 100 payment promised to the creditors would only be made if the company's cash-flow were equal to SEK 1450; otherwise, the creditors' cash-flow would be equal to 0. Suppose that the company's managers act in the shareholders' best interest; would they choose this new alternative or the project in (ii), if the company were allowed to con- tinue its activity? Which alternative should the creditors choose in this modified scenario, and what would be the optimised present value of their claims? 3.3. Considering the situation in 3.2, an expert has suggested that reducing the payment promised to the bondholders from SEK 1 100 to SEK 1000 would actually lead to an outcome such that the present value of the creditors' claims would be greater than the present value in the answer to 3.2. Is this suggestion justified? Provide all the calculations necessary to support your
