Share
Explore BrainMass

Project Payoff

Zymase is a biotechnology start-up firm. Researchers at Zymase must choose one of three different research strategies. The payoffs (after-tax) and their likelihood for each strategy are show below. The risk of each project is diversifiable.

Strategy Probability Pay-off (million)

A 100% 75

B 50% 140

50% 0

C 10% 300

90% 40

a. Which project has the highest expected payoff?

b. Suppose Zymase has debt of $40 million due at the time of the projectâ??s payoff. Which project has the highest expected payoff for equity holders?

c. Suppose Zymase has debt of $10 million due at the time of the projectâ??s payoff. Which project has the highest expected payoff for equity holders?

d. If management chooses the strategy that maximizes the payoff to equity holders, what is the expected agency cost o the firm from having $40 million in debt due? What is the expected agency cost to the firm from having $10 million in debt due?

Solution Preview

Hello,

I hope you are doing well. Please see my response below. I have done my best to answer your question to the best of my knowledge. I hope you find the response excellent. Thanks and good luck.

a.
Payoff for Project A: 75*100% = 75M

Payoff for Project B: 50%*140 + ...

Solution Summary

The solution does a superb job of laying out step by step explanation to the problem. The solution is very well explained and uses detailed steps to explain the answer. The solution can be followed by anyone with a basic understanding of the concepts. Overall, an excellent response.

$2.19