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Given: XYZ's assets are currently worth $1.7B and that the risk free rate is 10% P/A [annual compounding; a year from now, the value of XYZ assets will be either be worth $2.2 B or $1.6 B. XYZ issued some time ago a zero-coupon bond with face value of $2B; the bond matures exactly one year from now. XYZ Corp. has an opportunity to invest $100MM into a project with a certain PV of $200 MM. Should investment be made, the value of XYZ assets next year will be either $2.42B or $1.82B;
Q.1 Calculate the value of XYZ equity before and after the additional investment of $100MM. How will be divided the $100MM NPV gain between the bondholders and stockholders? Who will agree to provide these additional $100MM, stockholders or bondholders? Explain.
Q.2 Bondholders refuse to provide the whole $100MM financing and ask the stock holders to contribute too. But the XYZ Corp. threatens to change firm's business activity (should the bondholders refuse to provide the whole $100MM financing), so that the value of XYZ assets next year will be either $3B or $1B and value of assets today will become $1.2 B. Would the stockholders benefit from this change? Will the bondholders add $100MM of new money to prevent management from acting on this threat?
Finance is about Gunns Ltd, a company in dealing with forestry products in Australia. The company has also been listed in Australian Stock Exchange. As many companies producing forestry products, even Gunns Ltd is facing various problems. Due to the ..
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