Given: the value of assets of Sam corp. will be either $2.2 B or $1.6 B in a year from now. Sam issued some time ago a zero-coupon with face value of $2B; the bond will mature a year from now.
Sam Corp. has now an opportunity to invest $100MM into a project with a certain [i.e., risk-free] PV=$200 MM and NPV=$100MM. If investment is made, the value of Sam assets next year will be either $2.42 B or $1.82 B ;
Assume that value of Sam's assets was $1.7B before the investment and that the risk free rate is 10% P/A [annual compounding].
A. Calculate the value of Sam equity before and after the additional investment of $100MM.
B. How will the $100MM NPV gain be divided between bondholders and stockholders
C. Will stockholders provide the $100 MM needed for this very profitable project?
D. Assuming that stock holders refuse to add any new funds, should the existing bondholders provide additional $100MM financing? Explain.