Suppose a company borrows $1 million debt to invest in a project that generates

uncertain future cash flow (revenue) of O~$2 million (when debt is due). The debt has

to be repaid (interest rate is zero) when the project's cash flow is realized. Assume

35% of the cash flow (revenue) is lost upon bankruptcy (i.e., when debtholders

control the firm). Also, assume that renegotiations are allowed and the manager may

be allowed to stay if debtholders find it better than firing. Instead of equal bargaining

power, if lender has 25% bargaining power (lender gets 25% of renegotiation), at

what company cash flow does strategic default start to occur?

a) 1.65 million

b) 1.36 million

c) 1.16 million

d) 0.85 million