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Economics

Consider the example of moral hazard problem when a firm issues bonds/takes loans. We have shown that if the a sufficiently large fraction of the project is financed by the firm’s internal funds (in our example, 25%), the firm will choose Project S (the project with higher expected return and lower risk). Suppose now only 10% of the project is financed by the firm’s internal funds, and the remaining 90% is financed by bonds/loans. Will the firm still choose Project S?

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Business Economics, Economics

Category:- Business Economics
Reference No.:- M91839220

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