Question: 3. Conflict Between Debt And Equity ( 20 points) Suppose a company currently has $10 excess cash for investment. There are three potential projects with

3. Conflict Between Debt And Equity ( 20 points) Suppose a company currently has $10 excess cash for investment. There are three potential projects with the following projected cash flows next year: For simplicity, there is no time discount. a) Suppose the firm is purely equity financed. How does the firm rank the three projects? Show your work. ( 5 points) b) Suppose the firm carries debt maturing in the next year with face value $10. How does equity holder rank the three projects? How does debt holder rank the three projects? For face value $1, redo the rankings. (10 points) c) What is risk shifting problem? ( 2 points) Comparing your findings in b) and a), briefly discuss the relation between risk shifting and the face value of debt. ( 3 points)

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