Suppose that you can monitor the firms’ investment decision
January 10th, 2018
Suppose that you can monitor the firms’ investment decision and prevent the firm from investing in a project that is too risky. The monitoring costs $50M. You can borrow the $50M at a 10% interest rate and repay the loan plus interest in one year. If you monitor the firm, what is your total expected payoff (bond – loan repayment) in one year?