Problem:
Zymase is a biotechnology start-up firm. Researchers at Zymase must choose one of three different research strategies. The payoffs (after-tax) and their likelihood for each strategy are show below. The risk of each project is diversifiable.
Strategy Probability Pay-off (million)
A 100% 75
B 50% 140
50% 0
C 10% 300
90% 40
a. Which project has the highest expected payoff?
b. Suppose Zymase has debt of $40 million due at the time of the projectâ??s payoff. Which project has the highest expected payoff for equity holders?
c. Suppose Zymase has debt of $10 million due at the time of the projectâ??s payoff. Which project has the highest expected payoff for equity holders?
d. If management chooses the strategy that maximizes the payoff to equity holders, what is the expected agency cost o the firm from having $40 million in debt due? What is the expected agency cost to the firm from having $10 million in debt due?