How much could they expect to be paid

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Case: Suppose Carly wants to finance her education, plus buy a home. She needs to borrow $400,000, and the cost of funds is 4%. She can try to obtain financing by issuing debt or equity. If Carly devotes minimal effort to her job, she will not get a promotion and raise, and her income will equal $50,000. If Carly works hard, however, she has a 50 percent chance of getting a promotion that will bump her salary to $110,000. Carly disutility of working hard is $25,000. Assume that information is asymmetric.

Question 1: Assuming the employer receives no surplus, how much does hard work, on average, contribute to the total surplus?

Question 2: If shareholders were to purchase a 20 percent share, how much could they expect to be paid?

Question 3: Suppose savers purchase Carly's securities because the securities pay the cost of funds. How much is Carly's expected payoff from devoting minimal effort? How much is her expected payoff from hard work? How much is her expected payoff from selling shares?

Reference no: EM133326302

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