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Costs of Financial Distress.

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The Salad Oil Storage Company (SOS) has financed a large part of its facilities with long-term debt. There is a significant risk of default, but the company is not on the ropes yet. Explain

a. why SOS stockholders could lose by investing in a positive-NPV project financed by an equity issue.

b. why SOS stockholders could gain by investing in a highly risky, negative-NPV project.

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Solution Summary

The cost of financial distress for Salad Oil Storage Company are determined. Why SOS stockholders could lose by investing in a positive-NPV project financed by an equity issues is determined.

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a. why SOS stockholders could lose by investing in a positive-NPV project financed by an equity issue.
** SOS Stockholders could lose if they invest in the positive NPV project and then SOS ...

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