Suppose a company borrows $1 million debt to'invest in a project that generatesuncertain future cash flow (revenue) of 0-$2 million (when debt is due). The debt hasto be repaid (interest rate is zero) when the project's cash flow is realized. Assume35% of the cash flow (revenue) is lost upon bankruptcy (i.e., when debtholderscontrol the firm). Also, assume that renegotiations are allowed and the manager maybe allowed to stay if debtholders find it better than firing. Instead of equal bargainingpower, if lender has 25% bargaining power (lender gets 25% of renegotiation), atwhat company cash flow does strategic default start to occur?1.16 millionO 0.85 million1.36 millionO1.65 million

Correct option is A. 1.16 million The given information: Debt value=$1 million Revenue = 0 - $2…

Answered: Suppose a company borrows $1 million…

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter16: Working Capital Policy And Short-term Financing

Section: Chapter Questions

Problem 5P

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