Reference no: EM132956006
Question - Colt Systems is facing a financial distress. Colt has a loan of $1.5 million due at the end of the year. Without a change in its strategy, the market value of its assets will be only $1.3 M at that time, and Colt will default on its debt. Colt is considering a new strategy.
The new strategy requires no upfront investment, but it has only a 30% chance of success. If the new strategy succeeds, it will increase the value of the firm's asset to $2 million. If the new strategy fails, the value of the firm's assets will fall to $900,000.
Would shareholders of Colt be interested in pursuing the strategy? Explain, provide necessary calculations.
Would debtholders of Colt be interested in pursuing the strategy? Explain, provide necessary calculations.
If chance of success of the strategy were only 1% would shareholders be interested in the strategy. Explain without the aid of computations.
What is the situation (conflict) described in the problem called?
If the amount Colt owed were only $700,000 would the above conflict arise? Explain, provide computations.
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