Question $11$ pts

You're a CEO of a $$1$ billion company. You are considering having the firm take a project that you personally enjoy as much as you would

enjoy $$100,000$ in wealth. The project does not affect your salary or your future career prospects. The project costs $$200$ million and pays

$$300$ million in one year with $20\%$ probability, $$150$ million with $60\%$ probability, and $$0$ with $20\%$ probability. What is the minimum ownership

at which the CEO won't be motivated to take this project?

$0\mathrm{.}2\%$

$0\mathrm{.}3\%$

$0\mathrm{.}4\%$

$0\mathrm{.}5\%$

Question $21$ pts

Your firm consists of $$10$ million in cash and a $$40$ million factory $($thus$,$ your firm value is $$50$ million$).$ You owe $$40$ million $($either

in the form of cash or factory$)$ to a debtholder at the end of the year whose contract specifies that you cannot pay dividends until

after he is repaid. You have no other liabilities. Assume the discount rate is zero.

The only project you are considering over the next year is a $$10$ million sprinkler system in your factory. Without the sprinkler

system there is a $50\%$ chance that the factory will burn down over the next year $($in which case the factory's value will drop from

$$40$ million to $$0).$ With the sprinkler system there is a $0\%$ chance the factory will burn down. The sprinkler system does not

otherwise affect the value of the factory and will be worthless at the end of the year.

How much value is created or destroyed for equity holders if they take the project?

$$5$ million created

$$10$ million created

S$5$ million destroyed

$$10$ million destroyed