Suppose that RFS corporation has issued debt with a book value of $18 million and has issued
Question:
Suppose that RFS corporation has issued debt with a book value of $18 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 $30 million in one period. Cost of investment is $20 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
a. What is the NPV of the project?
b. If you are a bondholder, do you want to take the project? Explain why you want to take the project.
c. If you are a shareholder, do you want to take the project? Explain why do you want or not want to take project?
Expert Answer:
a To calculate the Net Present Value NPV of the project we need to determine the present value of th... View the full answer
