Suppose that you have the same amount of information as the firms that are trying to raise funds to invest in a project. Your firm can issue a $$100$ bond that promises to pay $25$ percent in a year. Suppose there are two firms that are trying to raise funds to pay for a project. Firm A$\text{'}$s project is safe and is guaranteed to produce $$130$ in revenue. Firm B$\text{'}$s project is risky and has a two$-$thirds probability of producing $$180$ a year, and a one$-$third chance it produces nothing. What is the expected return on each project, and which firm will receive financing?

Question $27$Answer

a$.$

$$125$; $$120$; Firm A

b$.$

$$130$; $$180$; Firm B

c$.$

$$130$; $$120$; Firm A

d$.$

There is not enough information to answer the question.