Question

Suppose there are two potential projects for investment. Project 1 has a certain payoff of $50...

Suppose there are two potential projects for investment. Project 1 has a certain payoff of $50 in one year, while project 2 has a 50% chance of generating $100 in one year, and another 50% chance of generating $0 in one year. Suppose the company has an outstanding debt = $50.

(1)Which project will shareholders prefer? Justify your answer.
(2)Which project will debt holders prefer? Justify your answer.
(3)Which project will the financial manager prefer? Justify your answer.

Business   Finance   
0 0
Add a commentTranscribed image text
Next >

Homework Answers

Answer #1

1. Shareholder will be preferring project 2 because they will be taking additional risk in order to maximize the value of the organisation and they will also be wanting to maximize the value of their overall capital invested in the company so shareholder will be likely to take additional risk in order to maximize the value of the organisation and they will select project 2.

2. Debtholders will be selecting project 1 because they will be wanting to not take any additional risk, and they will also want to get assurance and project 1 will be having certainity of cash outcome so they will be selecting project 1.

3.finance manager will be selecting project 2 because project 2 have the probability of higher income andand higher probability of organisational value maximization and they are always wanting to maximise the profits of the company so they will be selecting project 2.

0 0
Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Log In

Sign Up

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
Suppose there are two potential projects for investment. Project 1 has a certain payoff of $50...
Suppose there are two potential projects for investment. Project 1 has a certain payoff of $50 in one year, while project 2 has a 50% chance of generating $100 in one year, and another 50% chance of generating $0 in one year. Suppose the company has an outstanding debt = $50. (1)Which project will shareholders prefer? Justify your answer. (2)Which project will debt holders prefer? Justify your answer. (3)Which project will the financial manager prefer? Justify your answer.
Profitablity Payoff (in $ millions) A 100% 85 B 50% 150 50% 0 C 10% 350...
Profitablity Payoff (in $ millions) A 100% 85 B 50% 150 50% 0 C 10% 350 90% 30 Zymase is a biotechnology startup firm. Researchers at Zymase must choose one of three different research strategies. The payoffs​ (after-tax) and their likelihood for each strategy are shown​ here, (table). The risk of each project is diversifiable a. Which project has the highest expected​ payoff? (choose one ) Project A Project B Project C b. Suppose Zymase has debt of $40 million...
You can choose to undertake two mutually exclusive projects: Project 1 will return in one year...
You can choose to undertake two mutually exclusive projects: Project 1 will return in one year a payoff of 120 with probability 10%, or a 0 payoff with 90% probability. Project 2 will return in one year a risk-free payoff of 15. Both projects require an initial investment of 10. You do not have any money and need to raise it from external debt holders. Assume that everybody is risk-neutral, that the risk-free interest rate is 0 and that bond...
Suppose you are a manager and you have three potential capital investment projects from which to...
Suppose you are a manager and you have three potential capital investment projects from which to choose. You are on a limited budget so you can only choose one of the three potential projects. Describe at least three methods you can use to select the one project in which to invest.
You have two potential investment projects, Project A and Project B. You can take one, but...
You have two potential investment projects, Project A and Project B. You can take one, but not both. The annual cash flows for the two projects are: Year 0 1 2 3 Project A Cash Flow -$50,000 $45,000 $5,000 $5,000 (respectively) Project B Cash Flow -$50,000 $5,000 $5,000 $50,000 (respectively). a) Compute the IRR for each project. b) Compute the NPV for each project if the appropriate discount rate is 5%. Which project would you take, and why? c) Compute...
1. Assume an entrepreneur has two projects to choose. Both require $100 investment. Assume the entrepreneur...
1. Assume an entrepreneur has two projects to choose. Both require $100 investment. Assume the entrepreneur is risk-neutral. Safe project: returns $140 for sure Risky project: Returns $ 200 with 50% chance and $50 with 50% chance. If bank required collateral of $100, what would be entrepreneur’s return in each case? Which project will entrepreneur choose? If 50% of all borrowers are safe and 50% are risky, what interest rate bank will need to charge to break even if no...
Nike's management team is considering two projects, a golf club project and a helmet project. A....
Nike's management team is considering two projects, a golf club project and a helmet project. A. Using the table below, calculate firm’s weighted average cost of capital: Nike: % of debt in capital structure 25% % of equity in capital structure 75% Before-tax required cost of debt 6% Tax rate 30% Cost of equity 11% B. Capital Budgeting Project information: Golf club project Helmet project Upfront costs (10,000,000) (8,000,000) Annual cash flows Year 1 $0 $3,000,000 Year 2 $0 $3,000,000...
Your firm consists of $1,000 in cash. You have two potential investment opportunities, both cost $1,000...
Your firm consists of $1,000 in cash. You have two potential investment opportunities, both cost $1,000 today. Project 1 pays $2,200 at the end of the year with 50% probability and $0 with 50% probability. Project 2 pays $10,000 at the end of the year with 10% probability and $0 with 90% probability. Assume the discount rate is 0%. Assume that you also have a debt contract whereby you owe $X to a debtholder at the end of the year....
Suppose that your organization is deciding which of four projects to bid on, as summarized in...
Suppose that your organization is deciding which of four projects to bid on, as summarized in the following table. Assume that all up-front investments are not recovered, so they are shown as negative profits. Draw a EMV diagram and calculate the EMV for each project. It would better if you copy the following table in MS Excel and present make a model. Write a few paragraphs explaining which projects you would bid on. Be sure to use the EMV information...
There are two types of potential borrowers in equal numbers among the population. All have projects...
There are two types of potential borrowers in equal numbers among the population. All have projects that require an investment of $100, which must be borrowed. Type A projects yield a gross return of $130 in one year with probability .8; they fail and yield 0 with probability .2. Type B projects yield a gross rate of return of $250 with probability .4, but fail, yielding zero, with probability .6. Potential lenders require a gross return of $102 on $100...
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT