Caratinga is a 100% equity company whose only option is to invest either in project A or project B (i.e., it can only invest in A or only invest in B). Each project requires an investment today of 500 million. Next year, project A pays 650 million with probability 75% and 250 million with probability 25%. Next year, project B pays 800 million with probability 25% and 250 million with probability 75%. After these cash flows, the firm will be shut down. There are no taxes, depreciation, or any other benefits.

a) Show that the company will be able to raise 500 million today via the issue of debt if it guarantees contractually that project A is chosen. Compute the terms of the debt (i.e., the face value), required by the lenders. Be precise: show your steps and explain your reasoning.

bShow that the company will not be able to raise 500 million today via the issue of debt if it guarantees contractually that B is chosen. Be precise: show your steps and explain your reasoning.