The Underinvestment Problem
Consider a firm that has the following two investment opportunities:
|
Project |
0 |
1 |
2 |
NPV |
|
A |
-50 |
100 |
50 |
100 |
|
B |
-75 |
100 |
25 |
If the firm is an all equity firm, what will the shareholders do?
What will be the value of the firm?