Question: A firm is worth $80 or $140 with equal probability and is financed with debt that has a face value of $90. The cost of

A firm is worth $80 or $140 with equal probability and is financed with debt that has a face value of $90. The cost of capital for all securities is 9%. If the firm issues new debt with a face value of $60 that has the same priority as the $90 debt being sold today, what effect will it have on the value of the existing debt?

The value of the existing debt will decrease $13.94

There will be no effect on the value of the existing debt

The value of the existing debt will decrease $17.43

The value of the existing debt will increase, but the amount of risk shared by the new bondholders must be known in order to calculate the exact amount of the increase

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