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Corporate Finance Sample Exam Questions with Answers
February 17, 2010 1 1. Consider an entrepreneur who owns a project with return R in the success state and return zero in the failure state (these are the only states), and with success probability p which depends on the entrepreneur’s effort. Suppose high effort implies p = pH and low effort implies p = pL and a private benefit B to the entrepreneur. You should assume risk neutrality, zero discount rate, and a perfectly competitive capital market. The investment cost of the project is i. (a) If pLR < i < pHR, what is the maximum amount of funds that can be raised from the capital market? Explain. (b) Suppose the entrepreneur has made the investment using private funds, and that there is percent probability that high effort is chosen and 1 |
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