Genie Corporation expects cash flows from its risky assets in one year of either $100 million or $16 million, with equal probability. The firm also has a debt with a face value of $29 million due in one year.

Genie is considering a new project that would require an investment of $18 million today and would result in a certain cash flow in one year of $22 million. Genie has $18 million in cash which it can use to invest in this project. If the cash is not used for financing the project, it will be distributed to equity holders as dividends.

Investors are all risk-neutral, and the risk-free discount rate is zero. There are no taxes.

Suppose that Genie proposes to sell half of its risky assets for $29m, use the proceeds to pay off the debt fully, and undertake the new project.

what would be the expected present values of Genie's debt and equity after implementing the project?

WIll the debt holders and equity holders be willing to go with this proposal? Explain why.

Answer rating: 100% (QA)

The expected present value of Genie s debt after implementing the project would be 0 The expected pr... View the full answer