19.28 Dead weight costs are high, for example, in firms in which consumers have to make an investment in the project, and in firms that have very illiquid assets
19.30
a.) Yest it happens immediately( in one day), so this project has a PV of 50%*$10+50%*$40= $25 and an NPV of $25-$20=$5
b.) Shareholders would have to put in $20. In the downstate, the extra $10 go to creditors. In the upstate, they get $20. They would vote against it, because their expected cash flow would be 50%*$0+50%*$20=$10. Creditors would love this- but they do not get to decide.
c.) The existing creditors would now receive either $60+ $10 or $60+$40, with equal probability. They would therefore receive $85. They would like this, because they would recieve the entire benefit
d.) The second arrangement is better for a firm-value perspective
19.32 Firms in which the managers are well-entranced would be most tempted by free cash flow
19.34 Advantage. There will be no conflicts between creditors and shareholders. Payout can effectively be named however the company chooses it to be. Disadvantage: These are unclear. Perhaps there are higher issuing costs for units
19.36:
a.) Debt is worth $80 and equity is worth $20
b.) NPV = (0.5*$0)+(0.5)*x) $60>0, so, x> $60/0.5. When xh> $120 [ 50% probability]
c.) If the equity receives more than $40[$120-$80] in the upstate, shareholders would prefer the project be taken - the firm must be worth more than $120 in the upstate - (-$60+v)+$100.$120 or v>$80. Therefore, if the project pays more than $80 in the upstate, shareholders would prefer it.When xl> $80 you do not have all the information.
e.) NO, This has to depend on your probability assessment as to the outcomes.
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