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The CEO of a company needs to invest in 1 of 3 potential new products (A, B, C) which require the same initial investment. All
The CEO of a company needs to invest in 1 of 3 potential new products (A, B, C) which require the same initial investment. All the three products have a positive NPV. The expected FCFs that these products will generate in one year are as follows: Product A will generate $120M (M=million) with probability 100%. Product B will generate $170M with probability 46%, and o otherwise. Product C will generate $130M with probability 80%, and 0 otherwise. The risk of each product is perfectly diversifiable, and the risk-free rate is equal to 0. The company has a debt repayment of $92.3M that is due in one year. Q: Since the CEO is mostly compensated in stock options, he/she will choose the product that maximizes the value of the equity. Given the CEO investment decision, what is the expected agency cost to the company? Report your answer in million (M) and round it to 2 decimal places
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