1. 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 - each equally likely. 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 $40 Million guaranteed in either state. This new project requires funding of $30 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. Assume that all cash flows are discounted at 0%.

1. 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)? [9 points]
2. The manager asks you to forgive $40 million in debt down to a new face value of $110 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. [8 points]
3. Will you accept the manager's request for the debt forgiveness of $40 million? Explain. If you reject the plan as is, determine the range of the size of the side payment the manager would need to pay you now so as to get this restructuring accepted. If you decide to split the surplus 50-50 then what would the side payment be? [3 points]