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A company is currently in the state of financial distress. It has $0.5M of debt that matures in a year from now.

A company is currently in the state of financial distress. It has $0.5M of debt that matures in a year from now. If the state of the economy in a year from now is favorable, then the value of Coup the company is going to be $0.7M and $0 in the unfavorable state. Both states are equally likely.


a) What is the expected value of the company's debt?

b) What is the expected value of the company's equity?


Suppose a firm can increase their network of chiropractor clinics. This expansion will require an investment of $0.1M. This investment will pay $0.2M in both states of the economy. The company plans to raise $0.1M through the subordinated debt issue. Assume 0% interest rate.


c) Will this project increase or decrease the value of the old debt? By how much?

d) Will this project increase or decrease the value of the equity? By how much?

e) Will this project increase or decrease the value of the new debt? By how much?

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