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The managers of a firm are asked to consider two possible new product lines…

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The managers of a firm are asked to consider two possible new product lines for the firm . Project 1 is quite risky and may result in a market value for the firm of $50 million in two Years ,or nothing .Project 2 is much more certain in outcome and may result in a firm market value as high as $25 million or as low as $15 million.

The face value of the company s debt ,payable in two years is $20 million

a- What are the possible payoffs to the bondholders under projects 1 and 2

b- What are the possible payoffs to the shareholders under project s 1&2

c- Which will the shareholders favor? The bondholders?

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The managers of a firm are asked to consider two possible new product lines for the firm . Project 1 is quite risky and may result in a market value for the firm of $50 million in two Years ,or nothing .Project 2 is much more certain in outcome and may result in a firm market value as high as $25 million or as low as $15 million.

The face value of the company s debt ,payable in two years is $20 million

a- What are the possible payoffs to the bondholders under projects 1 and 2

b- What are the possible payoffs to the shareholders under project s 1&2

c- Which will the shareholders favor? The bondholders?

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