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C3. ( Underinvestment) Assume the value of the firm's assets is $10,000 and that the fim na debts of S6,000. If a catastrophe occurs, the
C3. ( Underinvestment) Assume the value of the firm's assets is $10,000 and that the fim na debts of S6,000. If a catastrophe occurs, the assets are completely d value of $0. The probability of a catastrophe is 2% a. What is the value of debt and equity with no catastrophe? What is the value ofdebr and debt equity with a catastrophe? What is the expected value of debt and cquity Asume an insurance e valu nce policy can be purchased for $1.000. It pays off S10.000 in the he. Rccompute the value of debt and equity with no catastrophe ue of debt and equity with a catastrophe. (Remeberto deduct the t of a catastro Reco$1,000 insurance premium.) of the would be the impact of the investment in the i and equity nsurance policy on the va Who would benefit from the insurance policy, stockholders or debtholders
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