Are shareholders willing to finance the project

Assignment Help Financial Management

Reference no: EM131023176

A firm is contemplating whether to invest in a new project. The project requires an investment of 1 unit and can be “good” or “bad.” If the project is good, it pays off 1.5 units. If it is bad, it pays of 0.5 units. The manager and the shareholders have symmetric prior beliefs about the quality of the project and believe that it is good with probability 0.4. The investment in the project is borne entirely by shareholders. The manager obtains a wage of 0.1 units (paid from the project's payoff) if the project is undertaken, but no wage otherwise. The manager and shareholders are risk-neutral.

(i) Are shareholders willing to finance the project?

(ii) Characterize the set of beliefs under which shareholders would be willing to finance the project.

(iii) Suppose that the manager can choose a monitoring/screening technology that generates an informative signal about the project's quality. The realization of the signal can be “good” or “bad”, but the signal could be noisy in that its realization could be ”good” even though the project is “bad” and vice versa. What is the optimal technology that the manager should choose? Characterize the technology in terms of the distribution of the signal's realizations conditional on the project being good or bad.

Reference no: EM131023176

Questions Cloud

What is your total dollar return on this investment : Four months ago, you purchased 1,200 shares of LBM stock for $9.30 a share. Last month you received a dividend payment of $.065 a share. Today, you sold the shares for $8.62 a share. What is your total dollar return on this investment?

What is the maximum initial cost of company : Och, Inc., is considering a project that will result in initial aftertax cash savings of $1.77 million at the end of the first year, and these savings will grow at a rate of 1 percent per year indefinitely.What is the maximum initial cost of company ..

Explore the relationship between humanity and the divine : Explore the relationship between humanity and the divine - Compare and contrast how one of these topics is developed in The Odyssey and Dantes Inferno.

How many ways to select a subset of eight candies : How many ways to select a subset of eight candies from three types of candies if at most two candies of the first type can be chosen?How many ways are there to pick a collection of exactly 10 balls from a pile of red balls, blue balls, and purple bal..

Are shareholders willing to finance the project : A firm is contemplating whether to invest in a new project. The project requires an investment of 1 unit and can be “good” or “bad.” If the project is good, it pays off 1.5 units. If it is bad, it pays of 0.5 units. The manager and shareholders are r..

A manufacturer has determined : A manufacturer has determined that the total cost C of operating a factory is C(x)=1.5x^2+45x+15000

Humans and animals cost significantly different prices : Discuss some unique pricing issues faced by companies that operate in the pharmaceutical industry. What are some reasons why pharmaceutical companies often sells identical drugs for dramatically different prices in different countries? How can the sa..

Observation regarding sound financial systems : An International Monetary Fund Factsheet makes the following observation regarding sound financial systems: "A country's financial system . . . provide[s] a framework . . . [for] supporting economic growth." Do you agree with this observation? Bri..

Find the face value of a loan : Mark Golden needs $ 5255.57 to pay for remodeling work. His bank loans money at a discount rate of 9% for 270 days. Find the face value of a loan so he will have $ 5255.57 proceeds at the time of the loan.

User Account

All Pages