Consider the example of moral hazard problem

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Consider the example of moral hazard problem when a firm issues bonds/takes loans (in lecture note 9). 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?

Reference no: EM131096665

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