Zymase is a biotechnology startup firm. Researchers at Zymase must choose one of three different research strategies.
Question:
Zymase is a biotechnology startup firm. Researchers at Zymase must choose one of three different research strategies. The payoffs (after-tax) and their likelihood for each strategy are shown below. The risk of each project is diversifiable.
a. Which project has the highest expected payoff?
b. Suppose Zymase has debt of $35 million due at the time of the project’s payoff. Which project has the highest expected payoff for equity holders?
c. Suppose Zymase has debt of $130 million due at the time of the project’s payoff. Which project has the highest expected payoff for equity holders?
d. If management chooses the strategy that maximizes the payoff to equity holders, what is the expected agency cost to the firm from having $35 million in debt due? What is the expected agency cost to the firm from having $130 million in debt due?
Step by Step Answer:
Corporate Finance The Core
ISBN: 9781292158334
4th Global Edition
Authors: Jonathan Berk, Peter DeMarzo