Exercise 2. (7 points). Strudler plc, a widget company financed by both debt and equity, is undertaking a new project. If the project is successful the value of the firm will increase by 1.25 every year for two years, but if the project is a failure the value of the firm will decrease by 0.8 every year for two years. The current value of assets of Strudler is 400 million. Strudler has outstanding zero coupon bonds due in two years with a face value of 380 million. The risk- free rate of interest prevailing in the market is 7% per annum. a. Use the option pricing model to find the current value of Strudler's debt and equity. b. Compare the market value of Strudler's debt with the present value of an equal amount of debt that is riskless with two years until maturity. Is the firm's debt worth more than, less than, or the same as the riskless debt? Why? c. Suppose in place of the preceding project Strudler's management decides to undertake a project that is even more risky. The new project will cause the value of the firm, to either increase by 1.5 go down by 0.67 every year for the next two years. For simplicity assume that the current value of the firm's assets is still 400 million.