7. The Salad Oil Storage (SOS) Company 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 negative-NPV project financed by cash. c. Why SOS stockholders could gain from paying out a large cash dividend. How might the firm?s adherence to a target debt ratio mitigate some or all of the problems noted above?
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