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Assume all risks involved in this question are idiosyncratic (firm-specific) so investors' discount rate is always the risk-free rate, 10%. A firm currently has
Assume all risks involved in this question are idiosyncratic (firm-specific) so investors' discount rate is always the risk-free rate, 10%. A firm currently has two assets: $60 million cash and a risky investment project A that lasts for one year. It also has $121 million debt payment due next year. The firm faces an additional risky investment B that also lasts one year, which requires initial investment of $60 million today. Scenario 1 (50%) Scenario 2 (50%) cash flow of Project A $110 mil $44 mil cash flow of Project B $77 mil $33 mil If the manager's objective is to maximize firm value, will they invest in project B? If the manager's objective is to maximize shareholder value, will they invest in project B? Please explain.
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