Debt Overhang: I
Consider a firm with $4000 of principal and interest
payments due at the end of the year (assume
$3500 lent at 14.29% stated).  If there is a
recession, it will be pulled into bankruptcy
because its cash flows will be only $2400.  Else, it
will have cash flows of $5000.
The firm could avoid bankruptcy in a recession by
raising new equity to invest in a new project (soon
after beginning).  The project costs $1000 and
brings in $1700 in either state and has an NPV >
Recession and Boom states are equally likely.
Will it do the right thing and raise new equity funds?