Digital Drug Limited has risky assets-in-place with possible values next year presented below: Economy Probability Assets Good
Question:
Digital Drug Limited has risky assets-in-place with possible values next year presented below:
Economy Probability Assets Good
½
100
Bad
½
10
- Digital Drug has a one-year safe project to launch a new government-approved new drug that requires investment outlay of $15 million today and will generate $22 million next year.
- In addition, Digital Drug has $15M in cash. This money can be either paid out as a dividend or invested.
- Currently, Digital Drug has $35 million debt in its capital structure due next year.
- The risk-free rate is 10%.
(a) Will Digital Drug's shareholders fund the project? Explain.
(b) Will Digital Drug's shareholders fund the project by issuing new junior debt? Explain.
(c) Will Digital Drug's shareholders fund the project by issuing debt of same seniority? Explain.
(d) How about senior debt if the existing debt covenant doesn't prohibit the issuance of senior debt? Explain.
Parts (b), (c) and (d) require some simple calculation and numerical justification. Please show your supporting work.
Auditing A Practical Approach with Data Analytics
ISBN: 978-1119401742
1st edition
Authors: Raymond N. Johnson, Laura Davis Wiley, Robyn Moroney, Fiona Campbell, Jane Hamilton