The entrepreneur Tony Soprano is planning to start up a real estate firm with an initial investment of $12 million in order to develop gambling properties in New Jersey. Tony can invest this money in one of two developments, project A or project B. Project A generates cash flows with a present value (PV) equal to $18 million with a probability 0.60 and $6 million with a probability 0.40. Project B generates cash flows with a present value (PV) equal to $24 million with a probability 0.40 and $3 million with a probability 0.60. 

Explain how the use of debt financing for the real estate firm may result in excessive risk taking, and describe how the use of covenants and the use of convertible debt could mitigate this problem. (No calculations are needed!) (10 points)

Answer rating: 100% (QA)

The use of debt financing can result in excessive risktaking for a real estate firm like Tony Sopran... View the full answer