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You are evaluating a loan request of $2.5 million from Dubious Corp.The firm has an existing debt repayment obligation of $5 million.It has $2.6 million of equity.The firm has two projects, A and B.An investment in A will yield a payoff of $5 million with probability
0.8 and $2.5 million with probability 0.2.Project B will yield a payoff of $8 million with probability 0.4 and zero with probability 0.6.The firm has assets-in-place that generates $6 million with probability 0.8 and zero with probability 0.2.Assume that the distributions of payoff from projects A and B are common knowledge, and the payoff from A is statistically independent of the payoff from B.However, as a bank lending officer, you cannot observe the firm's project choice.
-Suppose that after receiving the loan, the firm considers investing in B under the assumption that project A would be chosen).Is this moral hazard problem going to benefit the firm's shareholders?
A)Yes, since the expected value of equity in project B is $4.40 million which is more than $4.16 million with project A.
B)Yes, since the expected value of equity in project B is $4.16 million which is more than $3.60 million with project A.
C)No, since the expected value of equity in project B is $4.16 million which is less than $4.40 million with project A.
D)No, since the expected value of equity in project B is $3.60 million which is less than $4.16 million with project A.
E)No, since the expected value of equity in project B is $3.60 million which is less than $4.40 million with project A.

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Use the following information for questions 
You are evaluating a loan request of $2.5 million from Dubious Corp.The firm has an existing debt repayment obligation of $5 million.It has $2.6 million of equity.The firm has two projects, A and B.An investment in A will yield a payoff of $5 million with probability
0.8 and $2.5 million with probability 0.2.Project B will yield a payoff of $8 million with probability 0.4 and zero with probability 0.6.The firm has assets-in-place that generates $6 million with probability 0.8 and zero with probability 0.2.Assume that the distributions of payoff from projects A and B are common knowledge, and the payoff from A is statistically independent of the payoff from B.However, as a bank lending officer, you cannot observe the firm's project choice.
-Suppose that after receiving the loan, the firm considers investing in B under the assumption that project A would be chosen).Is this moral hazard problem going to benefit the firm's shareholders?
A)Yes, since the expected value of equity in project B is $4.40 million which is more than $4.16 million with project A.
B)Yes, since the expected value of equity in project B is $4.16 million which is more than $3.60 million with project A.
C)No, since the expected value of equity in project B is $4.16 million which is less than $4.40 million with project A.
D)No, since the expected value of equity in project B is $3.60 million which is less than $4.16 million with project A.
E)No, since the expected value of equity in project B is $3.60 million which is less than $4.40 million with project A.

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The Answer of Use the following information for questions 
You are evaluating a loan request of $2.5 million from Dubious Corp.The firm has an existing debt repayment obligation of $5 million.It has $2.6 million of equity.The firm has two projects, A and B.An investment in A will yield a payoff of $5 million with probability
0.8 and $2.5 million with probability 0.2.Project B will yield a payoff of $8 million with probability 0.4 and zero with probability 0.6.The firm has assets-in-place that generates $6 million with probability 0.8 and zero with probability 0.2.Assume that the distributions of payoff from projects A and B are common knowledge, and the payoff from A is statistically independent of the payoff from B.However, as a bank lending officer, you cannot observe the firm's project choice.
-Suppose that after receiving the loan, the firm considers investing in B under the assumption that project A would be chosen).Is this moral hazard problem going to benefit the firm's shareholders?
A)Yes, since the expected value of equity in project B is $4.40 million which is more than $4.16 million with project A.
B)Yes, since the expected value of equity in project B is $4.16 million which is more than $3.60 million with project A.
C)No, since the expected value of equity in project B is $4.16 million which is less than $4.40 million with project A.
D)No, since the expected value of equity in project B is $3.60 million which is less than $4.16 million with project A.
E)No, since the expected value of equity in project B is $3.60 million which is less than $4.40 million with project A.

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