# Question: Suppose the firm in Problem 23 21 is considering two mutually

Suppose the firm in Problem 23.21 is considering two mutually exclusive investments. Project A has an NPV of $1,200, and project B has an NPV of $1,600. As a result of taking project A, the standard deviation of the return on the firm’s assets will increase to 55 percent per year. If project B is taken, the standard deviation will fall to 34 percent per year.

a. What is the value of the firm’s equity and debt if project A is undertaken? If project B is undertaken?

b. Which project would the shareholders prefer? Can you reconcile your answer with the NPV rule?

c. Suppose the shareholders and bondholders are, in fact, the same group of investors. Would this affect your answer to (b)?

d. What does this problem suggest to you about shareholder incentives?

a. What is the value of the firm’s equity and debt if project A is undertaken? If project B is undertaken?

b. Which project would the shareholders prefer? Can you reconcile your answer with the NPV rule?

c. Suppose the shareholders and bondholders are, in fact, the same group of investors. Would this affect your answer to (b)?

d. What does this problem suggest to you about shareholder incentives?

## Relevant Questions

Kate is interested in buying a European call option written on EastJet Airlines Ltd., a non–dividend paying common stock, with a strike price of $75 and one year until expiration. Currently EastJet’s stock sells for $78 ...A stock is currently selling for $47 per share. A call option with an exercise price of $45 sells for $3.80 and expires in three months. If the risk-free rate of interest is 2.6 percent per year, compounded continuously, ...An analyst has informed you that at the issuance of a company’s convertible bonds, one of the two following sets of relationships existed: Assume the bonds are available for immediate conversion. Which of the two scenarios ...Indicate the effect that the following will have on the operating cycle. Use the letter I to indicate an increase, the letter D for a decrease, or the letter N for no change. a. Receivables average goes up. b. Credit ...You place an order for 400 units of inventory at a unit price of $125. The supplier offers terms of 1/10, net 30. a. How long do you have to pay before the account is overdue? If you take the full period, how much should you ...Post your question