Firm C has a debt of $1 million due at the end of the year, and the
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Question:
- Firm C has a debt of $1 million due at the end of the year, and the market value of its assets will be $0.9 million at the end of the year. Firm C has the following investment opportunities
Investment 1 requires 0 initial investment. It will generate either $0.2 million or -$0.25 million of cash at the end of the year with equal probabilities.
Investment 2 requires $0.1 million investment and it will generate a risk-free return of 200% at the end of year. However, firm C needs to raise $0.1 million in new equity to finance the investment.
- Will shareholders of firm C go ahead with investment 1? First answer the question and then show your calculation.
- Will firm C be able to raise $0.1 million to pursue investment 2?
Assume firm C only has a debt of $0.5 million. Answer c and d.
- Will shareholders of firm C go ahead with investment 1? First answer the question and then show your calculation.
- Will firm C be able to raise $0.1 million to pursue investment 2?
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