dous | AutoScroll Slide Show | Screenshot OCR | e K At et bt i [Total: 25 marks] Suppose that managers have more information than outside investors about the company's projects and expected cash flows. Outside investors cannot tell apart whether the company has in place good quality assets (that produce cash flows of 100) or bad quality assets (that produce cash flows of 50). Managers know that the company has in place good quality assets. The discount rate is zero. Assume that the managers act in the interest of the existing equityholders of the company. a) The company has access to a safe project that costs 10 to finance and produces cash flows of 20 tomorrow. Assume that the only way to finance the project is by issuing equity. If outside investors attribute a probability 50% that the company has good assets and 50% that the company has bad assets, what is the minimum value of the share s of the company that has to be sold to the outside equityholders so that this project can be financed with outside equity. Is the project going to be executed? Explain your answer. [6 marks] b) The company has access to a safe project that costs X to finarj~e and produces cash flows of 20 tomorrow. Assume that the only way to financ'the project is by issuing equity. If outside investors attribute a probability 50% that the company has good assets and 50% that the company has bad assets, what is the maximum value of X so that this project can be financed with outside equity? [6 marks] ~) The company has access to a safe project that costs 10 to finance and produces ~ cash flows of 20 tomorrow. Assume that the only way to finance the project is by ~ issuing debt. If outside investors attribute a probability p that the company has good assets and 1-p that the company has bad assets, what is the minimum value of p so