XYZ Limited has risky assets$-$in$-$place with possible values at the end of Year $1$ as presented below:

XYZ Ltd$.$ has full autonomy of making financial and investment decisions in the best interests of its

shareholders.

XYZ Limited has a one$-$year safe project that requires investment outlay of $$15$ million today

and will generate $$22$ million next year.

In addition, XYZ has $$15M$ in cash. This money can be either paid out as a dividend or invested.

Currently, XYZ has $$35$ million debt in its capital structure due at the end of Year $1.$

The risk$-$free rate is $10\%.$

$($a$)$ What are the debt and equity value of XYZ based on its "best" financial and investment

decision? Explain.

$($b$)$ Will debt forgiveness work for XYZ to invest in the good project? What is the highest

possible of amount of debt forgiveness that XYZ$\text{'}$s banker would agree? Briefly explain.

$($c$)$ Will XYZ fund the project by issuing debt of the same seniority$?$ Briefly explain.$|$