a) Would you issue new equity and undertake the new project?
b) Now assume that the bank offers to forgive a little over 20 so that your new debt face value is just under 80. Now, would you undertake the project?
c) Would it surprise you that the bank may have unilaterally offered to forgive debt? Explain.
2. Answer the following short answer questions.
a) Read the section in Chapter 16 in the Brealey and Myers textbook concerning Rights Issues. The rights issue is an alternative approach used by management to obtain equity financing. In general, you should note the following about rights issues:
• Setting a lower subscription price makes the deal more likely to get done
• The deal not getting done will reflect badly on management
• It is less likely that underpriced firms will have a significant price drop (which results in the deal not getting done).
Given this information and what you've learned in the course, give a qualitative explanation for the following evidence:
• Firms who announce cash offers suffer a decrease in stock price.
• Firms who announce rights issues enjoy a stock price increase.
• For firms who offer rights issues, higher subscription prices lead to higher stock prices.
b) You are consulting the CFO