Equity as an Option and Net Present Value - Sunburn Sunscreen has a zero-coupon bond issue outstanding with a $15,000 face value that matures in one year. The current market value of the firms assets is $15,800. The standard deviation of the return on the firms assets is 38 percent per year, and the annual risk-free rate is 5 percent per year, compounded continuously.

Suppose the firm is considering two mutually exclusive investments. Project A has an NPV of $1,200, and project B has an NPV of $1,600. As a result of taking project A, the standard deviation of the return on the firms assets will increase to 55 percent per year. If project B is taken, the standard deviation will fall to 34 percent per year.

a) What is the value of the firms equity if projects A is undertaken? Use the BlackScholes model.

b) What is the value of the firms equity if projects B is undertaken? Use the BlackScholes model.