4. (Option) BB Construction Lid., is a construction firm financed by both debt and equity. It is going to undertake a new project which will last for a year. If the project is successful the value of the firm next year will be 880 million, but if the project is a failure (eg. delay, cost overrun, etc), the firm will be worth only 500 million. The current value of the firm is 630 million, a figure that includes the prospect for the project. BB has outstanding zero coupon bonds due in one year with a face value of 680 million Suppose that the 1-year risk-free rate in the market is 4% and BB pays no dividend to shareholders (a) Find the current value of BB's equity and debt. (Hint use two-state Binomial model) (12 marks) (b) Given that BB has 250000 shares of common stock outstanding. What is the price per share of the firm's equity? (4 marks) (c) What would be the market value of BB's debt if it was riskless with the same one-year maturity? Is it higher than / lower than / the same as the market value of BB's debt in the above case? (5 marks) (d) Suppose that in place of the above project, BB decides to undertake a more risky one-year project, which will increase the value of the firm to 1100 million or decrease to 400 million next year. Assuming that the value of the firm wil remain the same as 630 million now. What will be the current value of BB's equity and debt? Will bondholders be better off or worse off? What is the economic intuition beneath? (12 marks)