Reference no: EM133003595

-You own the loan to a firm with face amount of $160 million due in one year. The firm will just last the one year generating cash flows of $200 million and $100 million with probabilities of 0.75 and 0.25, respectively. A new project is available that requires an investment of $36 million and pays off a certain $44 million in one year. Unfortunately, the firm has no cash and needs to seek outside capital. Assume the manager is currently the sole shareholder and your debt is protected with a pari passu covenant and so debt is not allowed to be issued senior to you without permission.

(a) Do you expect the manager to undertake the project? Assume that he issues Junior Debt for the capital needed for the project; and, determine the face value of that Junior Debt to demonstrate the payoffs to all investors

(b) The manager asks you to forgive debt down to $125 million. Given the same issues as part (a) would you expect the manager to undertake the project? Explain.

(c) Will all the parties agree to this deal from part (b)? Explain. If not, then how could the equity be shared so that all the parties equally share in the surplus of the restructuring? That is, demonstrate what percentage of the equity would split the surplus of the restructuring so that each of you get half.