A firm with no assets and debt outstanding with face value of $60 a new project I=130. Cash flow will be $200 in a boom and $160 in a recession . a boom and a recession are equally likely to occur at t=1, before the state of nature is revealed and before the debt is matured. Assume that if shareholders do not take the project, debtholders cannot undertake it.
How much money should investors raise?
What is the agency cost of debt?
at t=1, after the state of nature is revealed, but before the debt is matured. Assume that if shareholders do not take the project, debtholders cannot undertake it.
How much money should investors raise in each state
What is the agency cost of debt at t=1 for each state?
What is the value of equity, debt and the total firm at t=0?
What is the agency cost of debt at t=0?