Suppose a firm needs to pay back $1 million to their debtholders next year and they distribute the rest of the payoff to the shareholders. He faces two mutually exclusive projects. The payoff is listed in the following:

 

A. Which project will bondholders choose?

B. Which project will shareholders choose?

C. Which project should the manager choose if they wish to maximize firm value? 

Project A's payoff to the firm Project B's payoff to the firm Good condition - 50% probability 1.5 million 2 million Bad condition - 50% probability 1.2 million 0.2 million