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Should shareholders finance the new investment

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Question - BHR Plc is going through a difficult period, with its assets being worth either £70M or £30M at the end of the year - both states being equally likely. The company has two types of debt: (i) senior bank debt with a face value of £30 million; and (ii) junior debt with a face value of £30 million. There are 1 million shares outstanding. Both senior and junior debt are due at the end of the year and do not require interest payments. Assume a 0% interest rate throughout (no time discounting and risk neutrality).

Required -

A) What is the market value of senior, junior debt, and equity as of today?

There is an investment opportunity for BHR Plc. If the company invests £10 million it can expect a certain gain of £15 million in either scenario.

B) Should shareholders finance the new investment? Show your calculations.

C) Suppose that the existing debt has no covenants, what could be the ideal strategy? Show your calculations.

D) Assuming that a negotiation with debtholders is possible, what could be a way forward for BHR's shareholders? Is there any deal that leaves some or all debtholders better off? Explain and show your calculations.

Reference no: EM133174584

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