Company ABC just sold their most profitable division for $100 million in cash. The company has a market value balance sheet shown below (in millions). The bonds outstanding have an annual payment that is due in one month that equals 10% of the book value (400 x .10 =$40 million). Note: If the payment is not made on time it accrues a penalty of 1% or $400,000 per month unpaid: Assets BV MV Liabilities BV MV Cash$100    $100 LT bonds$400   $100 Fixed Asset$900        $0 Equity$600       $0 Total$1,000    $100 Total$600   $100 The board is considering using the$100 million to sponsor a music festival that might be a success or a failure. The expected payoffs are as follows:   Probability                              Payoff         5%                                   $500 25%$200       50%                                     $50 20%$0   B) Instead of the music festival, the company has the opportunity to participate in a government sponsored program that guarantees a return of 10%. This program requires minimum participation of $200 million that is paid in cash and the discount rate is 5%. (i) If the company issues$100 million in new equity to fund the obligation, what are the expected market values on the balance sheet (ignore the interest payment on the debt)   (ii) The company issues $100 million in debt at an interest rate of 20% to fund the opportunity, does this help the stockholders position? (Note: consider all the amounts due the debtholders) Question Company ABC just sold their most profitable division for$100 million in cash. The company has a market value balance sheet shown below (in millions). The bonds outstanding have an annual payment that is due in one month that equals 10% of the book value (400 x .10 = $40 million). Note: If the payment is not made on time it accrues a penalty of 1% or$400,000 per month unpaid:

Assets              BV     MV     Liabilities             BV      MV

Cash                $100$100    LT bonds             $400$100

Fixed Asset     $900$0    Equity                 $600$0

Total             $1,000$100    Total                    $600$100

The board is considering using the $100 million to sponsor a music festival that might be a success or a failure. The expected payoffs are as follows: Probability Payoff 5%$500

25%                                   $200 50%$50

20%                                       $0 B) Instead of the music festival, the company has the opportunity to participate in a government sponsored program that guarantees a return of 10%. This program requires minimum participation of$200 million that is paid in cash and the discount rate is 5%.

(i) If the company issues $100 million in new equity to fund the obligation, what are the expected market values on the balance sheet (ignore the interest payment on the debt) (ii) The company issues$100 million in debt at an interest rate of 20% to fund the opportunity, does this help the stockholders position? (Note: consider all the amounts due the debtholders)