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o Consider a firm that has a bank loan outstanding that requires the firm to repay $900 one period hence 19. $300 in retained earnings

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o Consider a firm that has a bank loan outstanding that requires the firm to repay $900 one period hence 19. $300 in retained earnings that can either be paid out as a dividend to the firm's shareholders or invested in a project that will yield a single cash flow one period hence. The firm has a choice of investing in a safe project S, or a risky project R. The safe project will yield $1000 for sure one period hence, whereas the risky project will yield $2000 with prob- ability 0.4 and nothing with probability 0.6. Assume that everybody is risk neutral and that the discount rate is zero. Which project has the higher total NPV for the firm? Which project will the firm choose, assuming that decisions are made to maximize shareholder wealth

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