Task: Zymase is a biotechnology start-up firm. Research at Zymase must choose one of three different research strategies. The payoffs (after-tax) and their likelihood for each strategy are shown below. The risk of each project is diverifiable.
Strategy Probability Payoff ($ million)
A 100% 75
B 50% 140
50% 0
C 10% 300
90% 40
Question 1: Which project has the highest expected payoff?
Question 2: Suppose Zymase has debt of $40 million due at the time of the project's payoff. Which project has the highest expected payoff for equity holders:
Question 3: Suppose Zymase has debt of $110 million due at the time of the project's payoff. Which project has the highest expected payoff for equity holders?
Question 4: If management chooses the strategy that maximizes the payoff to equity holders, what is the expected agency cost to the firm from having $40 million in debt due? What is the expected cost to the firm having $110 million in debt due?