ATTEND ONLY IF YOU CAN SOLVE ALL THE QUESTIONS TOGETHER. IF NOT I WILL REPORT YOUR ANSWER IF PARTLY ANSWERED.

Markus Co. is a manufacturing firm. Markus Co.'s current value of operations, including debt and equity, is estimated to be $500 million. Markus Co. has $200 million face-value zero coupon debt that is due in three years. The risk-free rate is 5%, and the volatility of companies similar to Markus Co. is 60%. Markus Co.'s performance has not been very good as compared to previous years. Because the company has debt, it will repay its loan, but the company has the option of not paying equity holders. The ability to make the decision of whether to pay or not looks very much like an option. Based on your understanding of the Black-Scholes option pricing model (OPM), calculate the following values and complete the table. Markus Co.'s management is implementing a risk management strategy to reduce its volatility. Complete the following table, assuming that the goal is to reduce Markus Co.'s volatility to 30%. Complete the following sentence, assuming that Markus Co.'s risk management strategy is successful: If its risk management strategy is successful and Markus Co. can reduce its volatility, the value of Markus Co.'s stock will ______, and the value of its debt will _____ .

We are examining a new project. We expect to sell 6,200 units per year at $76 net cash flow apiece for the next 10 years. In other words, the annual cash flow is projected to be $766,200=$471,200. The relevant discount rate is 18 percent, and the initial investment required is $1,730,000. After the first year, the project can be dismantled and sold for $1,600,000. Suppose you think it is likely that expected sales will be revised upward to 9,200 units if the first year is a success and revised downward to 4,800 units if the first year is not a success. Suppose the scale of the project can be doubled in one year in the sense that twice as many units can be produced and sold. Naturally, expansion would be desirable only if the project is a success. This implies that if the project is a success, projected sales after expansion will be 18,400 . Note that abandonment is still an option if the project is a failure. a. If success and failure are equally likely, what is the NPV of the project? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) b. What is the value of the option to expand? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)