Which project would shareholders prefer and why

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Reference no: EM131874190

A firm has the choice of investing in one of two projects. Both projects last one year. Project 1 requires an investment of $11K and yields either $11K or $13K with equal probability. Project 2 also requires an investment of $11K but yields either $5K or $20K with equal probability. The firm will raise $10K of the investment cost by issuing bonds at an annual interest rate of 10%.

(A) Which project would shareholders prefer and why?

(B) Which project would bondholders prefer and why?

Reference no: EM131874190

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