Ask Question, Ask an Expert

+1-415-315-9853

info@mywordsolution.com

Ask Corporate Finance Expert

problem: Suppose an entrepreneur owns a firm which has two production opportunities. Technology A produces an output (net profit) of 10 in state 1, an output of 20 in state 2, and an output of 90 in state 3. All states are equally likely. Technology B produces an output of 40, 50, and 60, respectively. Since of technological constraints, the entrepreneur can only implement one technology. The entrepreneur maximizes his expected utility.

a) Which technology must the entrepreneur implement and what is the value of the firm?

b) Assume that the firm has debt with face value 12 outstanding. What project does the entrepreneur implement?

c) Assume that the firm has debt with face value 50 outstanding. What project does the entrepreneur implement?

d) Find out the utility of the entrepreneur as a function of face value D for technology A and B, respectively.

e) What is the maximal debt level such that the entrepreneur still selects the (socially) efficient technology?

f) Assume that the firm only has equity and 98% of shares are owned by retailed investors and the initial entrepreneur owns 2% of the firm. What technology does he implement?

problem: Assume that an entrepreneur owns a firm that has a production technology that produces the following revenue: R(e) = e2 +100 e where revenue depends on his effort level e. The monetary cost of effort is given by: C(e) = 2e2. The entrepreneur is risk neutral and maximizes his expected utility.

a) What is the maximal value (profit) of the firm?

b) Suppose the entrepreneur sells 100% equity. After selling the firm, what effort level does the entrepreneur choose? What is the value of the firm?

c) Suppose the entrepreneur sells β% equity. What effort level does the entrepreneur choose? Is it efficient?

problem: Consider an economy with three dates {t = 0, 1, 2}. A firm has assets in place that generate an output (profit) of either 40 in state L or 160 in state H at t = 2. Bothe states equally likely. At t = 1, the firm can implement another project. The implementation costs are 110 and the new project delivers an output of 120 in state L and 130 in state H at t = 2. The owner of the firm and investors are risk neutral. They maximize their expected payoff. The risk free rate is r = 0. The firm wants to issue equity to finance the new project.

a) What is the value of the firm (i) without and (ii) with the project at t = 0?

b) What percentage of equity does the firm sell to raise the investment cost at t = 1?

Now suppose prior to issuing equity the firm learns the true state of t = 2 at t = 1.

c) Does the firm issue equity in both states?

d) What is the value of the firm if equity is issued?

problem: Internal finance can avoid the agency costs of debt and equity finance. In practice it is the most important source of funding.

a) Discuss potential problems of internal finance.
b)  What are potential solutions?

Corporate Finance, Finance

  • Category:- Corporate Finance
  • Reference No.:- M9250

Have any Question? 


Related Questions in Corporate Finance

Examine the data in the table belowgiven that both stocks

Examine the data in the table below. Given that both stocks trade for $50 and both options have a $45 strike price and a July expiration date, can we say that the option of Company A is overvalued or that the option of C ...

All other things being equal assume that us interest rates

All other things being equal, assume that US interest rates fall relative to UK interest rates. Again with all other things being equal, how should this affect the: (a) US demand for British pounds; (b) supply of pounds ...

Write an email to turn down an invitationyou are the

Write an email to turn down an invitation You are the purchasing manager at your firm and have received an email from Barbara Sorrels, one of your firm's major suppliers. She will be in town on October 13 and would like ...

Finance paper1 no more than one and half page due 1212

Finance Paper 1. No more than one and half page. Due 12/12 8am. First one is article, second one is short vrideo. Links are below. Read the following article on Dimensional Fund Advisors: http://www.wsj.com/articles/maki ...

Convert paragraph text to graphicsimagine that you want to

Convert paragraph text to graphics Imagine that you want to present the ideas for using video in presentations from this chapter to a group of people. Convert the Using Video section of this chapter to one slide. Use onl ...

Respond to domestic intercultural issues as a manager how

Respond to domestic intercultural issues. As a manager, how would you respond to each of the following situations? What kind of helpful advice can you give to each party? a. Alton gets angry when several of the people he ...

Verizon vs atampt financial analysisthe specific objective

Verizon vs AT&T Financial Analysis The specific objective of this graded written research exercise is to prepare an "executive level financial report" to the Chief Financial Officer (CFO) of a mythical company in which y ...

Facilitate a face-to-face meetinguse one of the scenarios

Facilitate a face-to-face meeting Use one of the scenarios in the previous exercise to practice facilitating and participating in a meeting. Have each person assume the role of another participant. Determine who will lea ...

Explain why the estimates from the two valuation methods

Explain why the estimates from the two valuation methods differ. Address the assumptions implicit in the models themselves as well as those you made during the valuation process. Also, explain why these prepared estimate ...

Do an online search of credit care debt management

Do an online search of credit care debt management, installment debt, and revolving credit. a. Is the total avoidance of debt an effective strategy to utilize in managing your debt and credit? Explain fully. b. Explain t ...

  • 4,153,160 Questions Asked
  • 13,132 Experts
  • 2,558,936 Questions Answered

Ask Experts for help!!

Looking for Assignment Help?

Start excelling in your Courses, Get help with Assignment

Write us your full requirement for evaluation and you will receive response within 20 minutes turnaround time.

Ask Now Help with Problems, Get a Best Answer

Section onea in an atwood machine suppose two objects of

SECTION ONE (a) In an Atwood Machine, suppose two objects of unequal mass are hung vertically over a frictionless

Part 1you work in hr for a company that operates a factory

Part 1: You work in HR for a company that operates a factory manufacturing fiberglass. There are several hundred empl

Details on advanced accounting paperthis paper is intended

DETAILS ON ADVANCED ACCOUNTING PAPER This paper is intended for students to apply the theoretical knowledge around ac

Create a provider database and related reports and queries

Create a provider database and related reports and queries to capture contact information for potential PC component pro

Describe what you learned about the impact of economic

Describe what you learned about the impact of economic, social, and demographic trends affecting the US labor environmen