Problem
Last Shot Corporation is deciding whether to invest in a new project or liquidate immediately. Currently, Last Shot has $2,000 of cash in the bank and owes $3,000 to its bondholders one year from now.
The project requires a $3,000 investment, to be funded from cash on-hand plus an additional $1,000 of new equity. The project is expected to return $3,500 in one year. The appropriate discount rate for debt, equity and the new project is 11%.
1. Ignoring any financial distress considerations, should the firm invest in the project? Show the data which supports this answer.
2. Do bond holders prefer that the firm take the project or not? Show the data which supports this answer.
3. Do stock holders prefer that the firm take the project or not? Show the data which supports this answer.