Principles of Corporate Finance (Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
Principles of Corporate Finance (Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
12th Edition
ISBN: 9781259144387
Author: Richard A Brealey, Stewart C Myers, Franklin Allen
Publisher: McGraw-Hill Education
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Chapter 18, Problem 23PS

Agency costs The possible payoffs from Ms. Ketchup’s projects (see Example 18.1) have not changed but there is now a 40% chance that project 2 will pay off $24 and a 60% chance that it will pay off $0.

  1. a. Recalculate the expected payoffs to the bank and Ms. Ketchup if the bank lends the present value of $10. Which project would Ms. Ketchup undertake?
  2. b. What is the maximum amount the bank could lend that would induce Ms. Ketchup to take project 1?
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