Robinson Enterprises has assets that will have a market value in one year as in Table 1: Probability Value ($ million) 1% 60 5% 70 24% 80 30% 90 25% 100 10% 110 5% 120 That is, there is a 1% chance the assets will be worth $60 million, a 5% chance the assets will be worth $70 million, and so on

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Robinson Enterprises has assets that will have a market value in one year as in Table 1: Probability Value ($ million) 1% 60 5% 70 24% 80 30% 90 25% 100 10% 110 5% 120 That is, there is a 1% chance the assets will be worth $60 million, a 5% chance the assets will be worth $70 million, and so on. Suppose the CEO is contemplating a decision that will benefit her personally but will reduce the value of the firm's assets by $10 million in every state. The CEO is likely to proceed with this decision unless it substantially increases the firm's risk of bankruptcy. The company had debt with face value of $69 million due in one year.

1. What is the probability of bankruptcy if the CEO does not take the value decreasing decision? Explain your result.

2. By what percentage would the CEO’s decision increase the probability of bankruptcy? Explain your result.

3. Assume no that the face value of debt is F (rather than 69 million). What values of F provide the CEO with the biggest incentive not to proceed with the decision (i.e., leads to the highest increase in the probability of default)? Explain your result.

4. Discuss the role that an increased level of debt plays in this example.