You're a CEO and you currently own 0.5% of a $1 billion company. You are considering having the firm take a project that you personally enjoy as much as you would enjoy $100,000 in wealth. The project does not affect your salary or your future career prospects. The project costs $200 million and pays $300 million in one year with 20% probability, $150 million with 60% probability, and $0 with 20% probability.

a. Assuming the discount rate is zero, would the project benefit the firm, and how much value would it create or destroy?

b. Would taking the project make the CEO happy, ignoring factors not mentioned in this problem?

c. What is the minimum ownership at which the CEO won’t be motivated to take this project?

Answer rating: 100% (QA)

a Assuming the discount rate is zero the project would benefit the firm as it has a positive expecte... View the full answer