a. “A signal is credible only if it is costly.” Explain why management’s willingness to invest in Marvin’s equity was a credible signal. Was its willingness to accept only part of the venture capital that would eventually be needed also a credible signal?

b. “When managers take their reward in the form of increased leisure or executive jets the cost is borne by the shareholders.” Explain how First Meriam’s financing package tackled this problem.