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Superheroes Inc, which is owned by Reg Perlbush, has filed for Chapter 11 bankruptcy. Perlbush owns Superheroes through a holding company called Superhold. The operating company, Superheroes, has $325M of debt outstanding. It has 100M shares of equity outstanding, 80% of which are owned by Superhold and 20% of which are owned by public shareholders. The holding company, Superhold, has $500M worth of public bonds outstanding, which are secured against the Superheroes shares that Superhold owns.

The operating company and holding company bankruptcies are being treated as one case. Perlbush has proposed a restructuring plan in which the holding company creditors will receive their collateral shares in exchange for their $500M in bonds. Perlbush will invest an additional $200M in Superheroes at a price of $1 per share, and the proceeds will be used for several immediate acquisitions. The operating company creditors will continue to have debt in the reorganized company worth the same as their original claims, $325M.

The reorganized company is expected to produce $60M of free cash flow at the end of the first year, which is expected to grow at 4% forever (note that this includes the cash flows of the companies it will acquire with the $200M investment). The correct weighted average cost of capital (WACC) for the company given the reorganization is 10%. Assume all parties agree that these projections are accurate.

a. (12 points) Under the proposed plan, what is the NPV of Perlbush’s proposed investment in the reorganized company’s equity?

b. (12 points) Under the proposed plan, what is the expected percentage recovery of the holding company creditors (i.e., what percentage of the value of their bonds do they receive through the value of their equity)?

c. (16 points) How much would the creditors’ recovery increase if Perlbush were required to buy the equity at fair value (i.e., at a per share price that correctly reflects the enterprise value of the post-reorganization firm), but the rest of the plan remained the same?

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