Mr. Altman has an idea for a new project, and he is considering starting a new business. The investment cost for the new project is $42 million today. After one year, the project will either succeed or fail, the value of the project becoming $100 million or $20 million, respectively. Since Mr. Altman has no money today, he wants to finance the project either through equity or debt.

Mr. Altman knows that after the investment, he has opportunities to take private benefits from the project. If he gives up the private benefits, the project will succeed with 80% probability and fail with 20% probability. If he pursues the private benefits, he can get $30 million into his pocket, but the project's probability of success reduces to 20% and the probability of failure increases to 80%.

Assume all potential investors are risk-neural and the risk-free rate is 0.

(a) (4 points) What is the minimum fraction of total shares for potential equity holders to break even? Can this project be equity financed?

(b) (4 points) What is the minimum face value of debt for potential debt holders to break even? Can this project be financed by debt?

Answer rating: 100% (QA)

Project Evaluation for Mr Altman Scenario Analysis We need to analyze both scenarios with and without private benefits to determine the expected value ... View the full answer