Question

	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 due at the time of the​ project's payoff. Which project has the highest expected payoff for equity​ holders? (Choose one)

Project A

Project B

Project C

c. Suppose Zymase has debt of $ 120 million due at the time of the​ project's payoff. Which project has the highest expected payoff for equity​ holders? (Choose one)

Project A

Project B

Project C

d. If management chooses the strategy that maximizes the payoff to equity​ holders, what is the expected agency cost to the firm from having $40

million in debt​ due? What is the expected agency cost to the firm from having $120 million in debt​ due?

If management chooses the strategy that maximizes the payoff to equity​ holders, the expected agency cost to the firm from having

$ 40 million in debt due is $______ million.  ​(Round to the nearest​ integer.)

The expected agency cost to the firm from having $ 120 million in debt due is $_______ million.  ​(Round to the nearest​ integer.)

Answer 1

a.E(A) = $85 million

E(B) =0.5*150 = $75 million

E(C) = 0.1*350+0.9*30 = $62 million

Project A has the highest payoff.

b. E(A) = 85 – 40 = $45 million

E(B) = 0.5*(150 – 40) = $55 million

E(C) = 0.1*(350-40)= $31 million

Project B has the highest payoff

c.

E(A) = $0 million

E(B) = 0.5*(150-120) = $15 million

E(C) = 0.1*(350-120) = $23 million

Project C has highest payoff

d

If management chooses the strategy that maximizes the payoff to equity​ holders, the expected agency cost to the firm from having $ 40 million in debt due is $10 million.  ​(Round to the nearest​ integer.)

The expected agency cost to the firm from having $ 120 million in debt due is $ 23 million.