Asteroid Company’s management is faced with the problem of financing a new project venture. Assume that management finances alre
ady-existing assets and those required for a new project with debts that have a value at maturity of Br. 4,200,000 for each project. Each of the debts is a zero-coupon debt and that the difference between Br. 4,200,000 and the present value of the debt at the start of each project is financed by equity capital. Management can decide to finance existing assets (Project X) and new project assets (Project Y) separately by using a project finance approach, or they could finance the combined projects using a corporate finance approach. Required: a. If management decided for corporate financing, i.e., cash flows from Projects X and Y are used jointly to repay the debts contracted for existing and new venture assets, what would be the payoffs to creditors and shareholders of the company under each scenario? b. If management decided for project financing, i.e., cash flows from Project Y are only used to repay the debts for that project, what would be the payoffs to creditors and shareholders of the company under each scenario? c. What are your recommendations for management under each of the foregoing financing alternatives considering contamination risk, conflict of interests, and coinsurance effect
Asteroid Company’s management is faced with the problem of financing a new project venture. Assume that management finances already-existing assets and those required for a new project with debts that have a value at maturity of Br. 4,200,000 for each project. Each of the debts is a zero-coupon debt and that the difference between Br. 4,200,000 and the present value of the debt at the start of each project is financed by equity capital. Management can decide to finance existing assets (Project X) and new project assets (Project Y) separately by using a project finance approach, or they could finance the combined projects using a corporate finance approach. Required: a. If management decided for corporate financing, i.e., cash flows from Projects X and Y are used jointly to repay the debts contracted for existing and new venture assets, what would be the payoffs to creditors and shareholders of the company under each scenario? b. If management decided for project financing, i.e., cash flows from Project Y are only used to repay the debts for that project, what would be the payoffs to creditors and shareholders of the company under each scenario? c. What are your recommendations for management under each of the foregoing financing alternatives considering contamination risk, conflict of interests, and coinsurance effect
