Petron Corporation’s management team
[ad_1]Petron Corporation’s management team is meeting to decide on a new corporate strategy. There are four options, each with a different probability of success and total firm value in the event of success, as shown below:
Strategy ABCD
100% 80% 60% 40%
50 60 70 80 Assume that for each strategy, firm value is zero in the event of failure.
- Which strategy has the highest expected payoff?
- Suppose Petron’s management team will choose the strategy that leads to the highest expected value of
Petron’s equity. Which strategy will management choose if Petron currently has
- (i) No debt?
- (ii) Debt with a face value of $20 million?
(iii) Debt with a face value of $40 million?
c. What agency cost of debt is illustrated in your answer to part (b)?
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