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Suppose that RFS corporation has issued debt with a book value of $18 million and has issued equity with a book value of $30 million. However, the market value of the firm is only $15 million now (i.e., the expected cash flow is $15 million if the firm is liquidated today). RFS Corporation has a potential project during the financial distress. The project generates $30 million in one period. Cost of investment is $20 million, and the firm only has $15 million now, so the shareholders will have to supply an additional $20 million to finance the project. Assume that opportunity cost of capital is 10%. Your answer should be in millions and accurate to two decimal places
a. What is the NPV of the project?
b. If you are a bondholder, do you want to take the project? Explain why you want to take the project.
c. If you are a shareholder, do you want to take the project? Explain why do you want or not want to take project?
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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