A company with no cash, no assets in place and no debt has two mutually exclusive projects:AandB. Both projects require investment of $100 million and last for one year. ProjectAyields $110 million in one year with certainty. ProjectByields either $140 million in one year in case of success or $50 million in one year in case of failure, the probability of success being 1/2. After the realization of the cash flows, either

of the projects is terminated and liquidated at value 0. As the company has no own funds, it has to raise the money in the market. After the money is raised, the management is free to choose betweenAandB, and the investors are aware of that. The management acts in the interest of the current shareholders. Everybody is risk-neutral. There is no discounting. The capital market is competitive.

1. a)Could the company obtain the required $100 million in debt financing by issuing a zero-coupon bond with the promised repayment (i.e., face value) of $100 million in one year? Which project would the management choose if it could issue such a bond? Explain your answer carefully and provide intuition where necessary.
2. b)Now assume that the manager is free to offer any face value to creditors. Will the manager be able to raise the required money by issuing debt? Explain your answer carefully and provide intuition where necessary.
3. c)Now assume that the required investment is $90 million. Will the manager be able to raise the required money by issuing debt? If yes, what face value would he offer? Which project would he implement after the money is raised? Explain your answer carefully and provide intuition where necessary.
4. d)Nowassumethattherequiredinvestmentis$70million.Answerthequestionsofpart (c). Will the project implemented in part (d) be different from the one implemented in part (c)? Explain your answer carefully and provide intuition where necessary