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Who is likely to gain and who is likely to lose

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Problem 1: Company X has $10M of excess cash (i.e., cash that is not used in the company's operations) and operating assets that will generate risky (i.e., uncertain) future cash flows with a present value today of $25M. It has no other assets. The company has risky zero-coupon bonds outstanding with a face value of $20M, and no other debt. Who is likely to gain and who is likely to lose from the following maneuvers? Justify your answers.

a) Company X pays a cash dividend of $10M to its shareholders.

b) Company X halts operations and sells all of its operating assets for $15M. It invests the proceeds from this sale along with its $10M of existing cash in Treasury Bills (i.e., risk free bonds).

Reference no: EM132984070

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