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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.

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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.

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