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Today, Lambda Corp has the following balance sheet. Note that the equity is negative. Cash 210 mn Debt Equity 300 mn -90 mn The debt
Today, Lambda Corp has the following balance sheet. Note that the equity is negative. Cash 210 mn Debt Equity 300 mn -90 mn The debt matures a year from today. Today, the firm has the opportunity to make an investment with an initial cost of 240 mn. If the investment is successful, it will be worth 390 mn a year from today. The probability of success is 50%. If the investment is unsuccessful, it will only be worth 60 mn a year from today. These are the only possible outcomes. The firm can use the available cash to finance the new investment but since this is not enough, the shareholders will have to supply the additional capital needed in order to do the investment. If the firm does not invest the cash available today it will still be available a year from today. Assume that the appropriate discount rate is 0. i. What is the NPV of the project? (2 points) ii. What is the value of the investment project for debtholders? (3 points) iii. What is the value of the investment project for shareholders? (3 points) iv. Briefly explain your findings (2 points)
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