Sarvon Systems has a debt-equity ratio of 1.2, an equity beta of 2.0, and a debt beta of 0.30. It currently is evaluating the following projects, none of which would change the firm’s volatility

(amounts in $ million):

Project A B C D E Investment 100 50 85 30 75 NPV 20 6 10 15 18

a. Which project will equity holders agree to fund?

b. What is the cost to the firm of the debt overhang?

AppendixLO1