[h]

A company has both assets in place and an investment opportunity that requires an investment I=100 at t=0. There are two possible, equally likely state of nature in the future.The company management will know the state of nature at time t=0 while the outsider will know the state of nature at t=1. Both the value of assets in place and NPV of the new investment will depend on the state of nature the value of the assets in place in State 2 is equal to 50+, where R+. Remember that in order to take the new investment the company needs to raise new equity from new equity holders for 100 (initial investment required). Also, remember that the firm's management work in the interest of current (old) shareholders. Pr(state 1) =1/2 Pr(state 2) =1/2 Assets in place a = 150 a = 50+ NPV new investment b = 20 b = 10 A) For what values of will the new investment be undertaken in state 1 only, state 2 only or both states? (Remember to show that, if you are claiming that equity will not be issued in state 1, there is no incentive for managers to issue equity in that state!!) B) What are the values of assets and the value of equity before (that is before the management know the state of the world) and after (that is after the management know the state of the world) the announcement of the project undertaking ( or the lack of such announcement). If it is possible, show the value of equity holding for the old shareholders and the new shareholders.