The firm can also invest in a new project today. That project requires a $30M investment but promises a $50M payoff in a good economy and $40M payoff in a bad economy next year. The firm also happens to have $30M in cash. You can use that money to invest in the new project today or you can pay out the $30M as a special dividend today. The $30M is not included in the asset values in the table above. Assume that everyone is risk neutral and the risk free rate is 8%.

a. Suppose the firm is financed with 100% equity. Will you invest in the project or distribute the cash as a dividend? (Calculations needed), show calculation please

b. Suppose the firm has bank debt and the amount (principal and interest) due next year is $150M. There are no debt payments due today. Will you invest in the project or distribute the cash as a dividend? (Calculations needed)

c. Restructuring: What is the new level of debt (principal plus interest) that will make you (the shareholder) indifferent between doing the project or restructuring the debt claims?(Calculations needed)

d. Explain: why did the restructuring plan make the bank better off even though the face value of debt was reduced? Max 2 sentences

You are the CEO and owner of a firm named Just one more Year. The firm is aptly named because it will be liquidated next year. The firm owns assets in place, and the value of these assets next year is uncertain and depends on the state of the economy next year: State of Economy Probability Value of Assets Next Year Good 0.4 0.6 $500M $100M Bad You are the CEO and owner of a firm named Just one more Year. The firm is aptly named because it will be liquidated next year. The firm owns assets in place, and the value of these assets next year is uncertain and depends on the state of the economy next year: State of Economy Probability Value of Assets Next Year Good 0.4 0.6 $500M $100M Bad