Rose Industries Has a $20 Million Loan Due at the End

question 62

Essay

Rose Industries has a $20 million loan due at the end of the year and its assets will have a market value of only $15 million when the loan comes due.Currently Rose has $2 million in cash.Rose is considering two possible alternative uses for this cash.One possibility is to pay the $2 million out to shareholders in the form of a special dividend.The second possibility is to invest the $2 million into a project that offers a $4 million NPV.What are the payoffs to the debt and equity holders under each of the two alternatives? Which alternative would equity holders prefer? Which alternative would debt holders prefer? What is the economic term that describes this situation?

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Definitions:

Cognitive Functioning

The mental processes involved in perception, thinking, reasoning, and remembering, which influence how we learn, solve problems, and interact with our environment.

Readiness Tests

Assessments designed to determine an individual's preparedness for a particular task, level of education, or developmental stage.

Developmental Observation

The process of systematically watching, listening to, and recording behaviors of individuals or groups over time to understand developmental progress or changes.

Visual/Spatial Discrimination

The ability to perceive and differentiate visual stimuli and spatial relationships among objects.