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Homework answers / question archive / Attention Industries has two divisions

Attention Industries has two divisions. Division 1 makes cleaning products and the net worth of this division (present value of cash flows) is $2,250. Division 2 makes a chemical product. The net worth of division 2 is $920, absent any potential liability. There is a chance that division 2 could have $2,450 liability for pollution damage. The potential victims have no contractual relationship with the firm. The probability of such a loss is 0.5/(1+????) , where s is the amount the firm spends on safety. The firm must choose the level of s. (Note that the derivative of a/(1+s) with respect to “s” is equal to −a/(1+s)^2)

i) First, calculate the total value of the firm, including both divisions at the same time, as an equation of “s”. Second, take the derivative with respect to s to find the “s” that maximizes the total value. Third, plug in the value of &l