19.10. Analysts project that Infotech, an information services company, will have the following financial data for equally probable high and low states:

The firm is currently financed entirely with equity.
The growth opportunity consists of a positive NPV project with a required initial investment of $200 and a value of $300. Management, knowing with 100 percent certainty whether the firm is in the high or low state, has a choice of taking the project and issuing debt, taking the project and issuing equity, or not taking the project and doing nothing. Examine the payoffs to current shareholders in the high and low states for each of these three decisions. What if management is unable to issue debt? (Hint: Which beliefs of investors are self-fulfilling?)

Value State: Low High Cash $100 $100 Fixed asset value 200 300 Growth opportunity NPV 100 100