A company has a zero coupon bond issue outstanding with a par (or face) value of$50 million that matures in 18months. The current market value of the firms assets is $60million. The annualized standard deviation of the return on the firms assets is 40 percent, and the annual risk-free rate is 4percent, compounded continuously.

a)The firm has a new project available. The net present value of the project is $5million. If the company undertakes the project, what is the market value of the firms equity and debt based on the Black-Scholes model? Assume that volatility remains the same.

b)What is the firms continuously compounded cost of debt after the project is undertaken?