A firm has existing operations that generate an earnings stream with a present value, PV, of 300
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The capital cost of each project (400) is financed with new junior debt (face value 400). Is there an asset substitution problem? (Will shareholders try to choose the lower NPV project?) Show whether any asset substitution problem would disappear if the new project were financed with an equity issue of 400 instead of new debt.
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Related Book For
Managerial Economics Theory Applications and Cases
ISBN: 978-0393912777
8th edition
Authors: Bruce Allen, Keith Weigelt, Neil A. Doherty, Edwin Mansfield
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