Question: Can you please help me and explain this problem to me in small understandable steps, I am really desperate because I do not know how

Can you please help me and explain this problem to me in small understandable steps, I am really desperate because I do not know how to solve this problem! Thank you very much!

Acompanymustraisenewcapitalexternallytoinvestinanewproject.Theinvestmentcostoftheprojectis100andtheprojectgeneratesacertaincashflowof140.Thisinformationisknown to the potential new external investors. The company has no internal financial resources tofinancetheproject,anditcanonlyraisenewequity externally.

However,thepotentialnewinvestorsdonotknowwhetherthecurrentassetvalueofthecompany(i.e., before investing in the new project) is 100 or 20 and estimate both possible values asequallylikely.Themanagerofthecompanyknowsthetruecurrentassetvalue,butcannotmakethisinformation publicforcompetitivereasons.

Allparticipantsarerisk-neutral,themanageractsintheinterestoftheexistingshareholdersandtherisk-freerateiszero.

Assumethatpotentialnewinvestorsbelievethatthemanagerwillraisenewequityandinvestinthenewproject,regardlessofthetruevalueoftheexistingassets.

Whatshareofthecompanyvalueafterinvestingintheprojectdoesthemanagerhavetooffertothenewexternalinvestorssothattheyfinance theinvestmentcostof100?
Assumethatthecurrentassetvalueofthecompanyis100.Doesthemanagerraisenewequity?
Assumethatthecurrentassetvalueofthecompanyis20.Doesthemanagerraisenewequity?

Nowassumethatpotentialnewinvestorsbelievethatthemanagerwillraisenewequityandinvestinthenewproject,onlyifthetruevalueoftheexistingassetsis20.

Whatshareofthecompanyvalueafterinvestingi intheprojectdoesthemanagerhavetooffertothenewexternalinvestorssothattheyfinancetheinvestmentcostof100?
Assumethatthecurrentassetvalueofthecompanyis100.Doesthemanagerraisenewequity?
Assumethatthecurrentassetvalueofthecompanyis20.Doesthemanagerraisenewequity?

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