ECO359H5 : Practice problem--it's very helpful ~
Document Summary
Eco 359 practice problems 5 suggested solution: (debt overhang) (a) air ontario"s expected value is ,ihh 0 hj - h 0 h ,jh. If mrs. lulu gets involved and invests, air ontario"s expected value becomes. ,ihh 0 hj - - h 0 h . The npv of the project for mrs. lulu is. & . ,jh - ,jh - ,ihh 0 . ,jh, since her initial investment is f = 20 million dollars, and she gets all the extra profit the company makes ,jh - ,ihh 0 . Mr. lulu will invest if and only if & 4 h, i. e. , & . ,jh - ,ihh 0 4 h 4 hj (b) no. The trick is in the word extra if the union insists that workers have a legal claim of face value b = m before mr. lulu, the extra profits for mrs. lulu"s investment is .
