Please answer question d

Tasco is a well-established company that sells apples, the value of the assets in place is 100 and it has no debt. The CEO of Tasco is considering entering the pear business. This would represent a net loss of 20 for Tasco but would generate private benefits to the CEO (the value to him of such benefits is 1.5). The CEO initially owns 5% of the company. The discount rate is O and there are no taxes. a) [5 marks] Is it in the CEO's interest to invest in the pear business? Would the answer be different if the CEO owned 50% of the equity? Explain. Suppose the firm does a recapitalisation: it issues debt with face value of 50 and uses the proceeds to buy back shares. Assume that the CEO does not sell any shares in the recapitalisation and that the debt is risk-free. b) [6 marks] Will the CEO invest in the pear business now? Explain. c) [7 marks] What is the minimum value of debt to be issued in the recapitalisation such that the CEO will not invest in the pear business? Assume that after Tasco undertakes the recapitalization described above part b. (i.e., the company issues safe debt with face value of 50 and buys back shares), its main competitor Waitviolet, launches a surprise and aggressive competitive attack that reduces the value of Tasco's assets to 70. The CEO devises two different strategies to counter Waitviolet's attack. The first is a marketing campaign that costs 20 and generates additional cash flows with a value of 30 for sure. The second is to adopt a new distribution technology that costs 25. However, the outcome is uncertain. Such strategy generates additional cash flows valued in 60 with probability 50%, and no additional cash flows with probability 50%. The safe and risky strategies are mutually exclusive: Tasco can take either the safe strategy or the risky one, but not both. d) [7 marks] Suppose that Tasco has enough internal cash to fund either strategy. Which strategy has a higher NPV? Which strategy will the CEO prefer? Explain