Learning Goal: I’m working on a finance exercise and need a sample draft to help me learn.
Novapharm must choose one of three different investment strategies. The payoffs (after-tax) and theirlikelihood for each strategy are shown below. The risk of each project is diversifiable.Strategy Probability Pay-offA 90% 18010% 30B 50% 32050% 0C 20% 55080% 50a. Which project has the highest expected payoff? (10 points)b. Suppose Novapharm has debt of $100 million due at the time of the projects payoff. Which projecthas the highest expected payoff for equity holders? (5 points)Suppose Novapharm has debt of$250 million due at the time of the projects payoff. Which projecthas the highest expected payofffor equity holders? (5 points)c. If management chooses the strategy that maximizes the payoff to equity holders, what is the expectedagency cost to the firm from having $100 million in debt due? (10 points)d. What is the expected agency cost to the firm from having $250 million in debt due? (10 points)e. From a theoretical perspective, what is the market imperfection that generates the agency costshighlighted in the previous questions? (10 points
