QUESTION BELOW

Suppose there are two states next year: the good and the bad, which would realize with equal probability. The asset value of company XYZ in different states are documented in the table below: State Prob. Assets ($ million) Good 1/2 100 Bad l 1/2 10 XYZ has some debt outstanding with the total face value of $40M. Assume that the discount rate is zero for all claims. a) (5 points) Write down the payoffs of the debt and equity in each of the two states next year. What are the valuations of debt and equity today? Suppose now the company has an investment opportunity that would acquire an investment of $40M now and would generate a payoff of $10M in the bad state and $90M in the good state. b) (15 points) If the manager plans to nance the investment by issuing new debt with higher seniority than the old debt, write down the payoffs in different states for the old debt claim, the new debt claim and the equity claim. What's the valuation of the equity claim if the project is taken? Will the shareholders approve this nancing plan? Will the existing debt holders approve this plan