Kidman Corporation's managers will choose a choice. There are four choices 
as follow: 

Choice 
A B C D 
Probability of Success 100% 80% 60% 40% 
Firm Value if Successful (in $ 
million) 50 60 70 80 
Please note that that firm value is zero in the event of failure for each choice. 
a. Which choice delivers the highest expected payoff? 
b. Kidman's managers will choose the choice that leads to the highest expected value 
of Kidman's equity. Which choice will its managers choose if Kidman currently 
has 
(i) No debt? 
(ii) Debt with a face value of $20 million? 
(iii) Debt with a face value of $40 million? 
Explain what agency cost of debt is illustrated in
part (b) of your answer?