Question: Firm D can invest 5,000 in a new project whose payoffs are 10,000 with probability 25% and 4,000 otherwise. Firm D will suffer a distress

Firm D can invest 5,000 in a new project whose payoffs are 10,000 with probability 25% and 4,000 otherwise. Firm D will suffer a distress cost of 4,000 if it is not able to pay the debt. Firm D is subject to a corporate tax of 40%. How should Firm D finance initial investment of the project?

A 80% debt and 20% equity.

B The firm would not invest in the project.

C 100% equity.

D 100% debt.

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1. Background knowledge of the subject and

4. What specific changes in the environment have taken place in relation to the information we have collected?

2. The purpose of the acquisition of the information.