Consider a highly levered firm with sole proprietorship a single owner runs the firm. Suppose that all the debt will mature in one year. The owner will pay off the debt if the firm value (V) is greater than the face value of the debt (D). Otherwise, the owner will declare bankruptcy the debtholders will receive the firm value, which is less than the face value of the debt, and take the control of the firm. A. Describe the payoff from the owners position. Can you express the owners position with an option on the firm value? B. Describe the payoff from the debtholders position. Show that the debtholders position is a combination of a risk-free loan and a written put option on the firm value. You may find it useful that min(A, B) = max(A, B). Using the results above, evaluate the following statement: Shareholders have an incentive to expropriate debtholders by taking high-risk projects that increase the volatility of the firm.