The Popov Company has been awarded the concessions at next year’s Olympic Games in Antarctica. Because the firm’s principals live in Antarctica and because there is no other concession business on that continent, their enterprise will disband after the games. The firm has issued debt to help finance this venture. Interest and principal due on the debt next year will be $800, at which time the debt will be paid off in full. The firm’s cash flows next year are forecast as follows:

As can be seen, the principals forecast four equally likely scenarios. If either of the first two scenarios occurs, the bondholders will be paid in full. The extra cash flow goes to the stockholders.

However, if either of the last two scenarios occurs, the bondholders will not be paid in full.

Instead, they will receive the firm’s entire cash flow, leaving the stockholders with nothing.

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Cash flow before interest and principal - Interest and principal Cash flow to stockholders Very Successful Games $1,000 800 $ 200 Popov's Cash Flow Schedule Moderately Unsuccessful Games Moderately Successful Games $850 800 $ 50 $700 700 $0 Outright Failure $550 550 $0