Xiomara Ltd, a manufacturing company is currently finalizing an investigation into the new product line's earnings potential, estimated to be between 30m and 100m. The research will reveal the true earnings potential, which will be any number between 30m and 100m. The investment cost is 40m, and the firm will not make the investment decision until the firm finalizes its investigation into the earnings potential of the new product line.

The face value of the current long-term debt burden of Xiomara is 20m. The debt is due shortly. and the firm can service only 5m of this liability from the firm's current earnings flow.

For your answer, you should assume that the market is risk-neutral, that the discount rate is zero. and that the earnings potential signal is distributed uniformly between 30m and 100m.

Please answer the following questions:

(a) If the firm had zero long-term debt, what would be the current value of the firm's equity (that is, before the firm finalizes its investigation into the earnings potential)?

(b) What is the current value of the firm's debt and equity?

(c) How do you explain the difference in the firm's value between (a) and (b)?

(d) Suppose the firm could use the investigation's outcome into the new investment's earnings potential to offer a debt restructuring. Would the debt holders be prepared to accept such a debt restructuring?

(e) Anticipating a debt restructuring and assuming the firm has all the bargaining power, what is the current value of the firm's debt and equity in this case?