a. Agency costs arise when there are conflicts of interest between stakeholders. A highly levered firm with risky debts faces agency costs. Provide discussions on one type of agency costs of leverage. [1.5 marks] b. Parnassus Corporation's Market Value Balance Sheet ($ Million) and Cost of Capital Assets Liabilities Cost of Capital 250 Debt Cash Debt 450 6% Other Assets 13% 1000 800 Equity Equity Tax rate 30% Parnassus Corporation's New Project Free Cash Flows ($ Million) 0 1 Year 2 3 4 60 -150 Free Cash Flow 120 144 90 Assume that this new project is of average risk for Parnassus Corporation and that the firm wants to hold constant its debt to equity ratio. Calculate the debt capacity for Parnassus Corporation's new project in year 1. [3.5 marks] NOTE: Typing is required. File attachment is NOT allowed.