Problem
A firm is about to issue debt with a face value of $100. Everybody knows that immediately after the issue it will have to choose between two investment projects. One project will have a 50% chance of ending up with 0 dollars, and 50% chance of $150, whereas the other will have a 70% chance of $100 and 30% of $101. Which project will shareholders choose? Which one will be preferred by bondholders?