2. A firm has debts of D = 350,000 payable next period. It is seeking to hire an interim manager, who has an outside option worth U* = 100,000. The firm has cash reserves of C = 250,000. If it does not hire the manager, it will be bankrupt when the debt comes due (D > C(1 + r), where r = 5% is the interest rate. If hired, the manager can choose between two projects A and B. The firm will then earn various levels of revenue whose probabilities depend on the project chosen. The probabilities are given in the following table. Revenue No manager Project A Project B R = 100M prob = 0 Q = 25% Bi = 40% R2 = 25M prob = 0 ay = 25% B2 = 15% R3 = 0 prob = 1 az = 50% Bz = 45% a. [10 marks) If the manager is paid a positive fraction h of the money left over after the old debt is paid off, find: i. the minimum value of h that would induce the manager to accept a contract to carry out project A; ii. the minimum value of h that would induce the manager to accept a contract to carry out project B; and iii. the minimum value of h that would induce the manager to accept a contract that gave a free choice of which project to implement? b. (10 marks) Find the expected payoff to the firm (the shareholders) if: i. They do not hire the manager? ii. They hire the manager with the best contract that makes the manager choose A? iii. They hire the manager with the best contract that makes the manager choose B? C. [7 marks) How would the answers change if the manager is paid before old debt is settled? d. [6 marks] How would your answer change if the manager was paid in stock (got share h* of the return to equity after old debt was settled)