xzy Corporation has $17 million of debt due in one year and a current project, which will generate a  payoff in one year of either 20 $ million or 5$ million( equally likely). The corporation has an opportunity to undertake a second project. The new project requires initial investment today of 12$ million and the payoff in one year from this project will be 15$ million. Assume all cash flows are risk-free and the risk free interest rate is 5%

 

1. What is the present value of the firm's debt and equity today if the firm decides to develop the new project?
2. What is the NPV of the new project?
3. What is the value of the firm's equity and debt today if the firm decides to develop the new project?
4. Would the equity holders be willing to provide equity financing for te project?
5. What would be the outcome of the investment decision of only junior debt could be issued for financing the investment?

      6. Explain what problem this exercise presents and discuss the possible solutions to this problem