9. MM, Capital Structure Changes and Debt Seniority Consider a single period binomial setting where the riskless interest rate is zero, there are no taxes and no frictions in capital markets. A rm will generate a cash ow of $240 if the economy is good, and $80 if the economy is bad. The good and bad states occur with equal probability. Everybody is risk neutral in the economy, hence risk considerations do not affect valuation. Initially, the rm has debt with face value of 60 due at the end of the period. (a) Compute the market value of equity and debt, and the value of the rm. (b) Suppose the rm unexpectedly announces that it will issue additional debt, with the same seniority as existing debt and a face value of $60. The rm will use the entire proceeds to repurchase some of the outstanding shares. What is the market price of the new debt? What is the new value of equity? Show how the MMI theorem still holds. (0) Suppose instead that the rm unexpectedly announces that it will issue additional debt, subordinated to existing debt and with a face value of $60. The rm will use the entire proceeds to repurchase some of the outstanding shares. What is the market price of the new debt? What is the market value of equity? Does MMl theorem hold