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Assume two companies, each with only one asset that will mature in one year for a cash value of $ 5 0 0 . That

Assume two companies, each with only one asset that will mature in one year for a cash value
of $500. That asset (or any part of it) can be exchanged for cash at present value, using 10%
discount rate. That is the companies can cash in enough of the asset to provide for any required
project investment. Company A is all equity financed and B has debt with par value of $400 to
be paid in exactly one year (no interest, only par). Both companies are presented with a new
project. The project will require a $300 investment and will have one payoff in one year. The
payoff is $1,000 with 25% probability and zero otherwise. Assume risk adjusted discount rate is
10%.
a. Will company A take the project?
b. Will company B take the project? What is the project NPV to B's shareholders?
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