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