(a) Consider a UK pharmaceutical firm developing and producing new drugs. The earnings of next year with existing projects are predicted to be 800 million. Nevertheless, there could be unexpected losses caused by risks, the earning would be reduced to 400 million with 50% probability. The firm has existing debt with face value of 600 million, and the bankruptcy cost is 200 million. The firm has identified 2 potential projects as shown below. Project NPV Fund required 300 million Present Value (PV) 600 million 300 million Project A on liver cancer drug Project B on Alzheimer's drug 300 million 1000 million (50%) 150 million (50%) 700 million (50%) -150 million (50%) (0) Explain asset substitution problem based on above information and how risk management could mitigate the problem assuming hedging could replace the lottery of 700m and -150m NPV of project B with 275m. Use calculations to support your discussion. (a) Consider a UK pharmaceutical firm developing and producing new drugs. The earnings of next year with existing projects are predicted to be 800 million. Nevertheless, there could be unexpected losses caused by risks, the earning would be reduced to 400 million with 50% probability. The firm has existing debt with face value of 600 million, and the bankruptcy cost is 200 million. The firm has identified 2 potential projects as shown below. Project NPV Fund required 300 million Present Value (PV) 600 million 300 million Project A on liver cancer drug Project B on Alzheimer's drug 300 million 1000 million (50%) 150 million (50%) 700 million (50%) -150 million (50%) (0) Explain asset substitution problem based on above information and how risk management could mitigate the problem assuming hedging could replace the lottery of 700m and -150m NPV of project B with 275m. Use calculations to support your discussion