The new strategy requires no upfront investment, but it has only a 30% chance of success. If the new strategy succeeds, it will increase the value of the firms asset to $2 million. If the new strategy fails, the value of the firms assets will fall to $900,000.

1. Would shareholders of Colt be interested in pursuing the strategy? Explain, provide necessary calculations.

2. Would debtholders of Colt be interested in pursuing the strategy? Explain, provide necessary calculations.

3. If chance of success of the strategy were only 1% would shareholders be interested in the strategy. Explain without the aid of computations.

4. What is the situation (conflict) described in the problem called?

5. If the amount Colt owed were only $700,000 would the above conflict arise? Explain, provide computations.