1.Assume a balance sheet for a company in distress:

Assets :

Cash: book value (BV) = 200, market value (MV) = 200 BV

Fixed asset: BV = 400, MV = 0

Total: BV = 600, MV = 200

Liabilities :

Long-term bonds: BV = 300, MV = 200

Equity: BV = 300, MV = 0

Total : BV = 600, MV = 200

Let's assume that bonds are not due today and there is an investment opportunity that costs 200 with large risks as follows:

ScenarioProbabilityPayoff

Success15%1,500

Failure85%0

Please compute the present value of bonds and equity with and without the project (assume that the required return of 50%). How much bold-holders and equity-holders would benefit/loose if the project is accepted? Do not just write down your final answer, please show explicitly your calculations. What does your results imply?