Question
Novapharm must choose one of three different investment strategies. The payoffs (after-tax) and their likelihood for each strategy are shown below. The risk of each
Novapharm must choose one of three different investment strategies. The payoffs (after-tax) and their likelihood for each strategy are shown below. The risk of each project is diversifiable.
Strategy Probability Pay-off
A 90%. 180
10%. 30
B 50% 320
50% 0
C 20% 550
80%. 50
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Which project has the highest expected payoff?
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Suppose Novapharm has debt of $100 million due at the time of the projects payoff. Which project has the highest expected payoff for equity holders
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Suppose Novapharm has debt of $250 million due at the time of the projects payoff. Which project has the highest expected payoff for equity holders?
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If management chooses the strategy that maximizes the payoff to equity holders, what is the expected agency cost to the firm from having $100 million in debt due?
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What is the expected agency cost to the firm from having $250 million in debt due?
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From a theoretical perspective, what is the market imperfection that generates the agency costs highlighted in the previous questions?
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