John Jacobs, the CEO of High Tech Industries, owns 51 percent of the shares of his $50 million company. The firm is starting a new project that requires $25 million in new equity capital. Jacobs is considering two ways to fund the project. The first is to issue $25 million in new equity. The second is to form a partially owned subsidiary of High Tech, which would be called Super Tech, and have the subsidiary issue the equity. Under the second proposal, Super Tech would be 55 percent owned by High Tech and 45 percent owned by new shareholders. Describe how the incentives of the managers of the new business and John Jacobs are likely to be affected by the two proposals.

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