Question $14(6$ points$)$

Which project would the company's stockholders prefer if they are risk neutral?

Risk$-$neutral investors prefer the strategy with the lowest risk. Thus, the company's stockholders prefer the low$-$volatility project since it minimizes the risk for equity holders.

Risk$-$neutral investors prefer the strategy with the highest expected value. Thus, the company's stockholders prefer the low$-$volatility project since it maximizes the expected value of the company's equity.

Risk$-$neutral investors are indifferent to risk. Thus, the company's stockholders will not prefer one project to another.

Risk$-$neutral investors prefer the strategy with the highest expected value. Thus, the company's stockholders prefer the high$-$volatility project since it maximizes the expected value of the company's equity.

Question $15(6$ points$)$

What is the best explanation of the agency costs faced by Fountain?

As there are no financial distress costs, managers may choose either the low or