Question: ABC incorporated is a software developer with assets in place that will generate the following state dependent cash flows in one year: $120 million if

ABC incorporated is a software developer with assets in place that will generate the following state dependent cash flows in one year: $120 million if the economy is good or $40 million if the economy is bad. Each state of the economy is equally likely. The company has debt with face value $60 million due in one year. All agents are risk neutral, the discount rate is zero and there are no taxes. The firm is run by a manager who acts in the interest of the equity-holders.

Find the value of the firm, the value of equity, and the value of debt.

Now assume that the firm has an investment opportunity that requires an investment of $15 million today and will generate a certain cash flow of $18 million in one year.

Find the net present value of the new investment opportunity.
Find the value of the firm, the value of equity, and the value of debt, if the investment was to go ahead. Discuss your results.
Based on your findings at the previous sub-questions, would the existing equity-holders be willing to provide $15 million needed for the project? Explain your answer.
What is the agency problem encountered by ABC incorporated? Suggest and explain one possible solution to this problem.

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