The value of HILEV firm at the end of one year can be $50 m or$100 m with equal probability of 0.5. The firm has debt with a facevalue of $50 m that matures in one year. Assume that investors arerisk-neutral and the risk free rate is zero. The CEO of the firmdecides to substitute assets of the firm with more risky assetsimmediately, so that the value of the firm at the end of one yearis either $30 m or $120 m with equal probability of 0.5. This assetsubstitution will lead to
A gain of $10 million for stockholders and a loss of $10 millionfor bondholders
b. A loss of $10 million for stockholders and a gain of $10million for bondholders
c. No gain or loss to debtholders or equity holders
d. Both debtholders and equity holders will lose $10 millionfrom the increased risk of the business
* I answered C and it was incorrect
