firm's only activity and that the firm will close one year from today. The firm is obligated

to make a $$3,700$ payment to bondholders at the end of the year. The projects have the

same systematic risk, but different volatilities. Consider the following information

pertaining to the two projects:

a$.$ What is the expected value of the firm if the low$-$volatility project is undertaken? What

if the high$-$volatility project is undertaken? $($Do not round intermediate calculations

and round your answers to the nearest whole dollar, e$.$g$.,32.)$

b$.$ What is the expected value of the firm's equity if the low$-$volatility project is

undertaken? What is it if the high$-$volatility project is undertaken? $($Do not round

intermediate calculations and round your answers to the nearest whole dollar, e$.$g$.,$

$32.)$

c$.$ Which project would the firm's stockholders prefer?

d$.$ Suppose bondholders are fully aware that stockholders might choose to maximize

equity value rather than total firm value and opt for the high$-$volatility project. To

minimize this agency cost, the firm's bondholders decide to use a bond covenant to

stipulate that the bondholders can demand a higher payment if the firm chooses to

take on the high$-$volatility project. What payment to bondholders would make

stockholders indifferent between the two projects? $($Do not round intermediate

calculations and round your answer to the nearest whole dollar, e$.$g$.,32.)$