1. The firm has a debt obligation of 198 due at t=1. The current asset value is 193; that is, the firm is under financial distress. The management believes that the asset value is most likely to remain at 193 at t=1 and the firm would go under. The firm has an investment project at the present time that requires 19 as initial investment. The value of the project has a 45% chance to become 29 (that is, a gain of 10) and a 55% chance to become 7 (that is, a loss of 12). The WACC for the project is 30 percent. If the firm invest in the project, what is the expected cash flow at t=1 for shareholders?
a. $1.32
b. $1.00
c. $2.25
d. $2.97
2. The firm has a debt obligation of 201 due at t=1. The current asset value is 196; that is, the firm is under financial distress. The management believes that the asset value is most likely to remain at 196 at t=1 and the firm would go under. The firm has an investment project at the present time that requires 20 as initial investment. The value of the project has a 60% chance to become 23 (that is, a gain of 3) and a 40% chance to become 19 (that is, a loss of 1). The WACC for the project is 3 percent. If the firm invest in the project, what is the expected cash flow at t=1 for debt-holders?
a. 193.7
b. 191.5
c. 195.4
d. 197.4