Ask Question, Ask an Expert

+61-413 786 465

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

Assignment -task requirements you have been randomly

Assignment - Task requirements: You have been randomly assigned an Australian publicly listed company (refer to the separate excel spreadsheet provided to identify your company). Using the financial reports for your comp ...

Assignment - pro forma financial statements external

Assignment - Pro forma financial statements, external capital needs and growth rates Pro-forma financials using percentage of sales method; 1. Obtain financial statements for a company for the last three years. The compa ...

Question - assume that the average firm in your companys

Question - Assume that the average firm in your company's industry is expected to grow at aconstant rate of 6 percent and its dividend yield is 7 percent. Your company is about as risky as the average firm in the industr ...

Q1 delta hedgingon sept 30th 2011 exxon mobil xom stock was

Q1 (Delta Hedging) On Sept 30th, 2011, Exxon Mobil (XOM) stock was traded at $72.63 while the December XOM put option with $75 exercise price is traded at $5.00 and the December XOM call option with $70 exercise price is ...

Assignment -this assignment is designed to test students on

Assignment - This assignment is designed to test students on Topic (Investment Appraisal) and on Topic (Dividend Policy). For Question 1, students are expected to appraise the attractiveness and risk of a capital asset p ...

Question - develop a forecast model for sales through

Question - Develop a forecast model for sales through operating income. Create the forecast in Excel. In a Word document, describe the set of assumptions (ratios) you used, and explain how you justify them. Attachment:- ...

Questions -q1 fv of ordinary annuity what is the future

Questions - Q1: (FV of Ordinary Annuity) What is the future value of a $50 annuity payment over 20 years if the interest rates are 6%? Q2: (PV of Ordinary Annuity) What is the present value of above annuity? Q3: (FV and ...

Assignment - npv and real option valuationproposed project

Assignment - NPV and real option valuation Proposed project: Alchemy Mines is considering an investment in the rights to a silver mine. Initial investment - The owner of the mine will sell the rights to Alchemy Mines at ...

Q1 delta hedgingon sept 30th 2011 exxon mobil xom stock was

Q1 (Delta Hedging) On Sept 30th, 2011, Exxon Mobil (XOM) stock was traded at $72.63 while the December XOM put option with $75 exercise price is traded at $5.00 and the December XOM call option with $70 exercise price is ...

Financial modelling assignment -1 today is 1 january 2018

Financial Modelling Assignment - 1. Today is 1 January 2018. Jackson who is aged 80 has a portfolio which consists of three different types of financial instruments (henceforth referred to as instrument A, instrument B a ...

  • 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

Why might a bank avoid the use of interest rate swaps even

Why might a bank avoid the use of interest rate swaps, even when the institution is exposed to significant interest rate

Describe the difference between zero coupon bonds and

Describe the difference between zero coupon bonds and coupon bonds. Under what conditions will a coupon bond sell at a p

Compute the present value of an annuity of 880 per year

Compute the present value of an annuity of $ 880 per year for 16 years, given a discount rate of 6 percent per annum. As

Compute the present value of an 1150 payment made in ten

Compute the present value of an $1,150 payment made in ten years when the discount rate is 12 percent. (Do not round int

Compute the present value of an annuity of 699 per year

Compute the present value of an annuity of $ 699 per year for 19 years, given a discount rate of 6 percent per annum. As