Careless Industries has two divisions. Division 1 makes cleaning products, and the net worth of this division (PV of cash flows) is 500. Division 2 makes a chemical product. The net worth of division 2 is 300, absent any potential liability. However, there is a chance that division 2 could have a 700 liability for pollution damage. The potential victims have no contractual relationship with the firm. The probability of such a loss is 0.2/(1 + s), where s is the amount the firm spends on safety. The firm must choose the level of s. If you could sell off division 2, would you do so? What is the gain from splitting the firm in this way? Assume a separated division 2 (as a standalone firm) is protected by limited liability. Also that the derivative of a/(1 + s) with respect to s is − a/(1 + s)2; that is, Δ[a/(1 + s)]/Δs = − a/(1 + s)2.