Question
Cicacola must choose one of three different research strategies. The payoffs (after-tax) and their likelihood for each strategy are shown below. Suppose Coke has debt
Cicacola must choose one of three different research strategies. The payoffs (after-tax) and their likelihood for each strategy are shown below. Suppose Coke has debt of $60 million due at the time of projects payoff. If management chooses the project that maximizes the payoff to equity holders, which project would they choose? What is the expected agency cost to the firm from having $60 million in debt due? Assume that each project requires an identical amount of initial investment and that the risk of each project is diversifiable.
strategy probability payoff millions
a 100% 85
b 50% 150
50% 0
c 10% 350
90% 25
Circle one of the responses (about the project choice): A B C
Agency Cost (in millions of dollars, rounded to two decimals): $_____________
Explain why (show calculations):
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