Project A has a guaranteed payoff of $200 million, which will exactly compensate the debtholders of the firm. Project B has a 50 percent probability of a $400 million payoff and a 50 percent probability of a zero payoff. Which project do the debtholders prefer and which project do the shareholders prefer?© BrainMass Inc. brainmass.com March 4, 2021, 7:57 pm ad1c9bdddf
Debt holders prefer less risky investments, thus they will opt for Project A having guaranteed payoff of $200 million. On ...
This solution explains which of two given projects is preferable to both debt holders and shareholders, given probability of payoff