32 . Two- State Option Pricing and Corporate Valuation Strudler Real Estate , Inc . , a construction firm financed by both debt and Equity , is undertaking a new project . If the project 15 Successful, the value of the firm in one year will be $ 380 million , but if the project is a failure , the firm will be worth only $ 210 million . The current value of Struder is $300 million , a figure that includes the prospects for the new project . Strudler has outstanding zero coupon bonds due in one year with a face value of $ 320 million . Treasury bills that mature in one year yield a 7 percent EAR. Strudler pays no dividends. 1 . USE the two-state option pricing model to find the current value of Struder's debt and EQUITY* . 2 . SUPPOSE Strudler has 500, 0do shares of common stock outstanding . What is the price per Share of the firm's Equity ?" 3 . Compare the market value of Strudler's debt to the present value of an Equal amount of debt that is riskless with one year until maturity . Is the firm's debt worth more than , less than , or the same as the riskless debt ? Does this make SENSE ? What factors might cause* these two values to be different ?" 4 . SUPPOSE that in place of the preceding project , Struder's management decides to undertake a project that is even more risky . The value of the firm will Either increase to $ 4 45 million or decrease to $185 million by the End of the year . Surprisingly , management concludes that the value of the firm today will remain at exactly $300 million if this risky* project is substituted for the less risky one . USE the two-state option pricing model to determine the Values of the firm's debt and Equity if the firm plans on undertaking this new project . Which project do bondholders prefer ?"