Barbara can seek financing by issuing either debt or equity.

Last updated: 7/6/2022

Barbara can seek financing by issuing either debt or equity. If Barbara devotes minimal effort to her job, her salary will remain at $80,000. If Barbara works hard, she stands a 50 percent chance of getting a promotion and a raise to $120,000, so that her expected income will be $100,000. Barbara's disutility of working hard is $16,000, and her cost of funds is $25,000. Assume that information is asymmetric and that everyone is risk neutral. Also, Barbara keeps the full surplus from her hard work. In equilibrium, Barbara issues A. equity; works hard B. equity; shirks C. debt; works hard D. debt; shirks