Question
Rose Industries has taken a 20 million loan that must be paid back by the end of the year. Unfortunately, the company and its assets
Rose Industries has taken a 20 million loan that must be paid back by the end of the year. Unfortunately, the company and its assets will only be worth 15 million by that time. Right now, Rose has 2 million in cash that can be used in two ways: either to use the cash to pay the companys shareholders in the form of a special dividend (1), or to invest the 2 million in a project with a net present value (NPV) of 4 million (2).
- What is the result/value for the shareholders and creditors at the end of the year for each alternative? (Ignore time value of money calculations) - Which alternative would the shareholders prefer? Lenders? - What problem occurs and which financial term describes this situation?
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