Question: Q1. You are an owner of a firm that has cash flows of $150 (good state) or $50 (bad state) next year with equal

Q1. You are an owner of a firm that has cash flows

Q1. You are an owner of a firm that has cash flows of $150 (good state) or $50 (bad state) next year with equal probability. Your firm has senior debt with face value $70 and junior debt with face value $10 outstanding. Ignore taxes and time value of money. (18 marks) a. What is the market value of equity? (6 marks) b. The firm has a positive NPV investment opportunity that costs $110 and yields $130 in the good state and $100 in the bad one. The project must be financed through an equity issue at a fair price in the market (and will be junior to the existing debt). Will the project go ahead? (6 marks) c/ If the project does not go ahead, then what haircut should existing senior debt holders agree on? Assume that existing junior debt holders will agree to write down $4 from their face value and that shareholders want an extra 1 from the new investment. (6 marks)

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