A company has its debt structured as a single zero-coupon bond that matures in 5 years.The face value of the debt outstanding is $40 million and the current value of the company's total assets is $36million. Thestandard deviation of the return of its assets is 30percent per year, and the risk-freerate is estimated to be about5percent per year, compounded continuously.

Compute the following quantities:

1. Current market value of the company's equity
2. Current market value of the company's debt
3. Continuously compounded cost of debt

Suppose this companyhas a new project opportunity available. This project has an estimated NPV of $3,000,000.

1. If the company undertakes the project, what will be the new market value of equity? Assume volatility is unchanged.
2. Assuming the company decidedtoundertake the new project and does not borrow any additional funds, what is the new continuously compounded cost of debt?Explain in detail the impact this project has on the cost of debt.