The Landmark car park will be shutting down tomorrow after having generated a final cash flow. it has debts of 500 used to finance its activities. Depending on whether the economic situation is good or bad (there is an equal probability of either), the flows are as follows:

Economic situation


Operating cash flow



Payment of debt



Shareholders” portion of cash flow



The company is offered an investment yielding 0 if things go badly (-) and 300 if things go well (+).

(a) What is the initial value of the debt? And of shareholders” equity?

(b) What is the objective value of the investment project? At what price would investors be prepared to invest? Does your answer depend on the way this investment is financed?

(c) What conditions would new creditors set for financing this new investment?

(d) Are conflicts that arise between shareholders and creditors a result of the way in which the company finances investments?