Sunburn Sunscreen has a zero coupon bond issue outstanding with a $10,000 face value that matures in one year. The current market value of the firms assets is $10,900. The standard deviation of the return on the firms assets is 31 percent per year, and the annual risk-free rate is 6 percent per year, compounded continuously. The firm is considering two mutually exclusive investments. Project A has an NPV of $2,400, and Project B has an NPV of $2,800. As the result of taking Project A, the standard deviation of the return on the firms assets will increase to 49 percent per year. If Project B is taken, the standard deviation will fall to 26 percent per year.

a-1. What is the value of the firms equity and debt if Project A is undertaken? (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)

a-2. What is the value of the firms equity and debt if Project B is undertaken? (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)

b. Which project would the stockholders prefer? multiple choice 1 Project A Project B

c. Suppose the stockholders and bondholders are in fact the same group of investors. Would this affect your answer to (b)? multiple choice 2 Yes No