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2. Underinvestment problem (12 point). The value of Hawkeye Corporation (HC) is either 120 with a 90% chance (good state) or 70 with a 10%
2. Underinvestment problem (12 point). The value of Hawkeye Corporation (HC) is either 120 with a 90% chance (good state) or 70 with a 10% chance (bad state). HC's face value of debt is 100 . A new investment project arises that pays 40 in the good state and 45 in the bad state. It requires 39.3 upfront, which is financed with junior debt. Junior debt is subordinated to senior debt. Assume an opportunity cost of capital equal to zero. a. Find the project's expected net present value. (1 point) b. Complete the following table to determine whether shareholders would want to implement the new investment project. (10 points)
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