You are the manager of a financially distressed corporation that has $5 million in loans coming due in 30 days. Your firm has $4 million cash on hand. Suppose that a long-time supplier of materials to your firm is planning to exit the business but has offered to sell your company a large supply of material at a bargain price of $4.5 million—but only if payment is made immediately in cash. If you choose not to acquire this material, the supplier will offer it to a competitor, and your firm will have to acquire the materials at market prices totaling $5 million over the next few months.
a. Assuming that you are operating the firm in shareholders’ best interests, would you accept the project? Why or why not?
b. Would you accept this project if the firm were unlevered? Why or why not?
c. Would you accept the project if the company were organized as a partnership? Why or why not?