What is the better arrangement from a firm value perspective

Reference no: EM131241572

A firm has debt with a face value of $100. Its projects will pay a safe $80 tomorrow. Managers care only about shareholders. A new quickie project comes along that costs $30, earns either $0 or $70 with equal probabilities, and does so by tomorrow.

(a) Is this a positive-NPV project?

(b) If the new project can only be financed with a new equity issue, would the shareholders vote for this? Would the creditors?

(c) Assume the existing bond contract was written in a way that allows the new projects to be financed with first collateral (superseniority with respect to the existing creditors). New creditors can collect $30 from what the existing projects will surely pay. Would the existing creditors be better off?

(d) What is the better arrangement from a firm-value perspective if the old bondholders have veto power?

Reference no: EM131241572

Questions Cloud

Do they provide information on standardization or validity : Give one a try and then do a web search for intelligence tests and see if you get the same results when you take a different test. Do the websites tell you how reliable the tests are? Do they provide information on standardization or validity? If ..

Purchase fits with the monopoly price-quantity model : Think of a time when you purchased something in a monopoly market. For example, purchasing a soft drink at movie theater is close to being a monopoly market since consumers have little choice of an alternative supply. Discuss how this purchase fits w..

Do the websites tell you how reliable the tests are : Give one a try and then do a web search for intelligence tests and see if you get the same results when you take a different test. Do the websites tell you how reliable the tests are? Do they provide information on standardization or validity? If ..

Create an informational letter to the parents inviting : Create an informational letter to the parents inviting them to a workshop that you will be hosting on Sexuality Development. In your letter provide information and highlight some facts that would be beneficial for parents know (ensure that your re..

What is the better arrangement from a firm value perspective : Is this a positive-NPV project? - If the new project can only be financed with a new equity issue, would the shareholders vote for this? Would the creditors?

Explain why these pais are most appropriate for jackie : Analyze the concept of the full-life (the pleasant life, the good life, the meaningful life) as it appears in Jackie's situation. Be sure to clearly define each of these theories in addition to providing specific details from the case scenario.

Government want this change in the value of the yuan : Recently, there has been substantial pressure on China from the U.S. government to allow the value of the yuan to decrease relative to the U.S. dollar. Why might the U.S. government want this change in the value of the yuan? How would such a change a..

The advantages and disadvantages of unit offering bundles : What are the advantages and disadvantages of unit offering bundles? - Are shareholders better off if they can expropriate bondholders?

Policy that could affect the implementation of medicaid : Research websites on Medicaid, Medicare, and CHIP to identify current, emerging policies. Analyze a policy that could affect the implementation of Medicaid, Medicare, and/or CHIP programs at a state or local board of health

User Account

All Pages