Suppose that a firm has assets in place which generate $$100$ million in good state

and $$50$ million in bad state, where either state is equally likely to occur. The firm

has outstanding debt with promised payments of $$50$ million. An investment project,

which requires $$10$ million and yields a risky cash flow of $$11$ million in the good state

and zero in the bad state, is now available to the firm. Suppose that the existing debt

has no covenant restricting the firm to issue senior debt to raise additional funds.

Assume zero riskless rate of interest and universal risk neutrality.

$($a$)$ If the firm has to issue equity to existing shareholders, would the firm optimally

choose to undertake the project given that its objective is to maximize share$-$

holders' wealth? Why?

$($b$)$ If the firm has to issue debt junior than the existing debt, would the firm op$-$

timally choose to undertake the project given that its objective is to maximize

shareholders' wealth? Why?

$($c$)$ If the firm has to issue debt with the same seniority as the existing debt, would

the firm optimally choose to undertake the project given that its objective is to

maximize shareholders' wealth? Why?

$($d$)$ If the firm has to issue debt senior than the existing debt, would the firm op$-$

timally choose to undertake the project given that its objective is to maximize

shareholders' wealth? Why?