1.Suppose Unoit can raise the $50 million by issuing a bond with a face value of $50 million (because the lender naively believes the company will take the safe project). With nave debtholders, what is the net payoff to equityholders with Project S, and what is the net payoff to equityholders with Project R?

A. The net payoff to equityholders with Project S = $10 million, and and the net payoff to equityholders with Project R = $20 million.

2.

Assume Project R will be chosen by shareholders, what is the expected net payoff to the naive lenders?

	A.	$5 million.
	B.	-$5 million.
	C.	$15 million.
	D.	-$15 million.
	E.	None of the above.

B. The net payoff to equityholders with Project S = $20 million, and and the net payoff to equityholders with Project R = $10 million.

C. The net payoff to equityholders with Project S = $5 million, and and the net payoff to equityholders with Project R = $10 million.

D. The net payoff to equityholders with Project S = $10 million, and and the net payoff to equityholders with Project R = $5 million.

E. None of the above

3.

Now suppose the debt holders are sophisticated. What interest rate must the debt holders be promised, which project will the company select, and what do the shareholders gain?

	A.	Debt holders be promised with interest rate of 30%; Project R will be chosen; the shareholders' gain = $5 million.
	B.	Debt holders be promised with interest rate of 40%; Project R will be chosen; the shareholders' gain = $10 million.
	C.	Debt holders be promised with interest rate of 40%; Project S will be chosen; the shareholders' gain = $5 million.
	D.	Debt holders be promised with interest rate of 60%; Project R will be chosen; the shareholders' gain = $5 million.
	E.	None of the above.