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Firm D can invest 5,000 in a new project whose payoffs are 10,000 with probability 25% and 4,000 otherwise. Firm D will suffer a distress
Firm D can invest 5,000 in a new project whose payoffs are 10,000 with probability 25% and 4,000 otherwise. Firm D will suffer a distress cost of 4,000 if it is not able to pay the debt. Firm D is subject to a corporate tax of 40%. How should Firm D finance initial investment of the project?
A 80% debt and 20% equity.
B The firm would not invest in the project.
C 100% equity.
D 100% debt.
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