Hartman Resources Corporation (HRC) is in financial distress. It recently sold off its tangible assets because it could not operate its business profitably. HRC's only remaining asset is $1 million in cash. Unfortunately, HRC previously issued zero coupon bonds with a face value of $2 million.

(a) If HRC were to be liquidated immediately, what would be the amounts paid to the bondholders and to the stockholders, respectively? Amount paid to bondholders: $

Amount paid to stockholders: $

(b) HRC's managers (who are also the stockholders) are considering using the $1 million in cash to fund a risky investment. In exchange for investing the $1 million, HRC would immediately receive either $1.8 million or $0, with equal probability. What is the NPV of this proposed investment? (Use a zero discount rate).

The NPV is equal to: $

(c) Assume that HRC commits to making this investment, but that the outcome is not yet known. HRC would be liquidated as soon as the outcome was known. What is the market value now of HRCs stock and of its bonds? (Continue to use a zero discount rate).

Market value of HRC's stock: $

Market value of HRC's bonds: $

(d) Explain the principle illustrated by this question here: