Costs of financial distress

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Reference no: EM1344340

The Salad Oil Storage Company (SOS) has financed a large part of its facilities with long-term debt. There is a significant risk of default, but the company is not on the ropes yet. Explain

a. why SOS stockholders could lose by investing in a positive-NPV project financed by an equity issue.

b. why SOS stockholders could gain by investing in a highly risky, negative-NPV project.

Reference no: EM1344340


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