You own debt with face amount of $150 Million that you lent to a firm managed by its sole shareholder, whose firm is expected to generate next year either a cash flow of $200 Million or $100 Million - with probabilities .6 and .4, respectively. This is a one-time, one year project and then the firm will be shut down.In addition there is a project P that will generate guaranteed cash flow of $50 Million in one year.This new project requires funding of $40 Million which the firm does not have, and so say he would have to issue junior debt to obtain the capital to undertake the project due to the covenants in your debt security.Assume that all cash flows are discounted at 0%.

a)

Do you expect the manager to undertake the new project P?Explain how he would acquire the capital - in other words, what is the face value for the new junior debt.(The existing debt had a pari passu covenant it turns out)?[10 points]

b)

The manager asks you to forgive $30 million in debt down to a new face value of $120 million.Again calculate what the face value would need to be for the junior debt and determine if the manager will now undertake the project with this restructuring plan.

c)

Would you push to adjust the terms of this restructuring (request for the debt forgiveness of $30 million)?Explain. What percentage of the equity would you ask for so that you each split the surplus of the restructuring 50-50.