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Economics (239)
ECO359H5 (14)
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Department
Economics
Course
ECO359H5
Professor
Sun
Semester
Winter

Description
ECO3592011 UniversityofToronto PracticeProblems5 DepartmentofEconomics ECO 359 Practice Problems 5 1. (D EBT O VERHANG ) Air Ontario is in deep financial trouble. If everything goes well, next period Air Ontario will be worth \$100 million, but this event only occurs with probability 15. With probability 45, the company is ultimately bankrupt -- it will be worth 0. Mrs. Lulu, a smart investor from Macao, contemplates saving Air Ontario. She believes she can turn around the business, but it would cost her F = \$20 million. If she enters, Air Ontario is worth \$100 million with probability 15 + and 0 with probability 45 - . If Mrs. Lulu gets involved, she would get all extra profits that the company makes. Assume there are no discounting, no interest rates, and no taxes. (a) For which values of does Mrs. Lulus engagement in Air Ontario have a positive net present value? From now on assume = 0.3. All that stands between Mrs. Lulu and the companys turnaround are the union. As it stands, workers have a legal claim of face value B = \$40 million in the next period (you can think about this as a debt-obli
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