Question 3: Project Decision under Asymmetric Information In the lecture note part I, now suppose the firm has an opportunity to do a project which costs $100 M, and has payoffs of: $99 M next period if Bad state occurs, and $184 M next period if Good state occurs. (a) Fill in the following table and find present value of payoff to equity. Bad (1/2) Good (1/2) Total Payoff Payoff to Debt Payoff to Equity Capital Structure o The firm has assets in place which will be worth $10 million next period if the Bad state occurs, but will be worth $120 million next period if the Good state occurs. o The firm has 130 million shares outstanding. o Assume that the required rate of return on equity is constant at 10% (this is not possible, as it changes as we change other factors below, but it simplifies the analysis). 39 . Capital Structure o So the firm, if nothing changes from the outline above, will look like the following table next period. (All numbers are in millions.) Table 3 Bad (1/2) Good (1/2) Total Payoff 10 120 Payoff to Debt 10 10 Payoff to Equity 0 110