Question
Suppose that RFS Corporation has issued debt with a book value of $20 million and has issued equity with a book value of $30 million.
Suppose that RFS Corporation has issued debt with a book value of $20 million and has issued equity with a book value of $30 million. However, the market value of the firm is only $15 million now (i.e., the expected cash flow is $15 million if the firm is liquidated today). RFS Corporation has a potential project during the financial distress. The project generates $40 million in one period. Cost of investment is $35 million, and the firm only has $15 million now, so the shareholders will have to supply an additional $20 million to finance the project. Assume that opportunity cost of capital is 10%. Your answer should be in millions and accurate to two decimal places (e.g., 10,500,000 should be entered as 10.50).
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