Reference no: EM132945159
Question - James, the CEO of an electronics firm, can invest $8 million in a project that will give a single cash inflow of $17 million in one year if James chooses to devote his full effort to the project ("work"). James's utility from the project is the payoff he receives from its cash flow. He has a hobby restoring vintage cars and can choose to spend part of his time on this relaxing activity instead of the project ("shirk"). If he does this, the project will give a single cash inflow of $12 million in one year. James's disutility from giving up his hobby to give his full effort to the project is $3m.
Assume James has no personal wealth and the project should be financed entirely by outside investors. James, and every potential investor in James's project, is risk-neutral. The discount rate is zero.
a) Suppose James finances the project with outside equity, and the investors believe he will choose to work.
(i) What proportion of equity will they demand? What will be the utility for James if he chooses to work?
(ii) Assume James can choose how much effort he uses for the project after the finance has been raised. What will his utility be, if he chooses to shirk?
b) Assume now the investors are aware of James's hobby. What proportion of equity will they demand? What will James's utility be if he chooses to shirk?
c) Suppose James can finance the project with debt. What will be the face value of the debt? What will James's utility be, if he chooses to work? What will it be if he chooses to shirk?
d) (i) Explain the agency cost of outside equity with reference to your answers to parts (a) to (c) above.
(ii) Suggest and briefly explain a possible solution to this agency problem, apart from the financing choice.
|
Describe an evacuation procedure at the centre
: Identify the safety signage and their meanings - different types of emergencies that may occur at your centre and describe what would need to occur to keep
|
|
Compute the depreciation
: In 2014, ABC Mining Co. purchased real estate containing copper for a total cost of P10,000,000. Compute the Depreciation for 2018
|
|
Explain how the centre obtains information
: Explain how the centre obtains information regarding children's specific dietary needs, food allergies or intolerances and who the information comes from
|
|
Explain hazards in the environment to children
: Describe the considerations when choosing equipment that is suitable for the age group of children you're working with and List five (5) checks
|
|
What proportion of equity will they demand
: Assume now the investors are aware of James's hobby. What proportion of equity will they demand? What will James's utility be if he chooses to shirk
|
|
What is the minimum transfer price it should accept
: Assuming the Can Division is already operating at full capacity, what is the minimum transfer price it should accept
|
|
Determine the retained earnings as of september
: Income tax expense $13,095, If Retained Earnings balance on September 30, 2018 was $57,860, determine the retained earnings as of September 1, 2018.
|
|
What is Ezra gross income from the receipt
: Ezra did not sell any shares during the year. What is Ezra's gross income from the receipt of the 2,100 shares as a two-for-one stock split in December
|
|
Determine the revenues for the year ending on december
: Determine the revenues for the year ending on December 31. The information was taken from the records of Henry Harsel Corporation for the month
|