Which of the projects would shareholders prefer and why

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A financially distressed corporation has $1.5M of debt outstanding that will mature (come due) at the end of the year and only $1M of cash on hand. Suppose it is offered the opportunity to invest its $1M of cash in either of two projects. Project 1: Risk-free treasury bills that yield an annual return of 4%. Project 2: A high-risk gamble that will pay off $1.6M with 40% probability but only $400K with 60% probability at the end of the year (A) Which of the projects would shareholders prefer and why? (B) If the firm were unlevered, which project would shareholders prefer and why? (C) If the firm were organized as a partnership rather than a corporation, which project would the owners of the partnership prefer and why? (Hint: Owners of a partnership are not protected by limited liability as are the owners of a corporation.)

Reference no: EM131873983

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