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The Best North Corporation is in financial distress and may not be able to pay its debt of $15M one year from now. The
The Best North Corporation is in financial distress and may not be able to pay its debt of $15M one year from now. The firm has $8M to invest in one of two projects which both cost $8M: Project A will return $9M with prob. 0.5 and $12M with prob. 0.5. Project B will return $1M with prob. 0.5 and $16M with prob. 0.5. Which project would be preferred by shareholders and what is its expected payoff to shareholders one year later? Project A, expected payoff to shareholders = 0 O Project B, expected payoff to shareholders = $0.5M Project A, expected payoff to shareholders $10.5M = O Project B, expected payoff to shareholders = $8.5M
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