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Considerastart-upfirmthathasthreedifferentpotentialbusinessmodelswhoseafter-taxpayoffsaresummarizedbelowalongwiththeirrespectiveprobabilities:StrategyProbabilityPayoff A 100% $75 B50%$140 50%$0 C10%$300 90% $40 (a)With$0indebt,whichstrategyhasthehighestexpectedvalueforequityholders? (b)With$40indebt,whichstrategyhasthehighestexpectedvalueforequityholders? (c)With$110indebt,whichstrategyhasthehighestexpectedvalueforequityholders? (d)Ifmanagementmaximizesthevalueofequity,doeshigherdebtleadthemtoinvestinmoreriskyorlessriskyprojects?

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  1. Considerastart-upfirmthathasthreedifferentpotentialbusinessmodelswhoseafter-taxpayoffsaresummarizedbelowalongwiththeirrespectiveprobabilities:StrategyProbabilityPayoff
  2. A 100% $75
  4. B50%$140
  5. 50%$0
  7. C10%$300
  8. 90% $40
    4. (a)With$0indebt,whichstrategyhasthehighestexpectedvalueforequityholders?
    5. (b)With$40indebt,whichstrategyhasthehighestexpectedvalueforequityholders?
    6. (c)With$110indebt,whichstrategyhasthehighestexpectedvalueforequityholders?
    8. (d)Ifmanagementmaximizesthevalueofequity,doeshigherdebtleadthemtoinvestinmoreriskyorlessriskyprojects?

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