The value of assets of Sam corp- Calculate the value

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].

1. Calculate the value of Sam equity before and after the additional investment of

$100MM.

2. How will the $100MM NPV gain be divided between bondholders and stockholders

3. Will stockholders provide the $100 MM needed for this very

profitable project?

4. Assuming that stock holders refuse to add any new funds, should the existing

bondholders provide additional $100MM financing? Explain.