Here are Multi$-$Universal's Project Payoffs on a $$100m$ investment:

Assume that investors are risk neutral and that the risk$-$free required rate of return is zero. Suppose

bondholders assume that the firm will choose Project A$.$ Then the stated interest rate will be $12\mathrm{.}5\%$ because

at this stated rate, the expected return to bondholders will be exactly $0\%,$ which is the equilibrium risk$-$free

required rate of return. This can be seen from the table below:

However, if bondholders make this assumption and require a stated rate of interest of only $12\mathrm{.}5\%,$

stockholders have an incentive to choose project $B.$ This can be seen by comparing the above payoff

matrix with the following payoff matrix detailing payoffs from project $B$ :

a$.$ Complete the payoff matrix from the Credit Rationing Problem with a $0\%$ risk$-$free required rate of

return for the case where the bondholders assume project B will be chosen. In particular, answer the

question as to which project equity holders will choose under this assumption.

b$.$ What would the minimum value of the project's payoff in the good state have to be for investors to be

willing to buy a bond from the firm at a price of $$100,$ assuming they believe project B is going to be

chosen $($and keeping the project payoff in the bad state to be $$50)?$

c$.$ If equityholders now chose project A$,$ what would be the expected return to bondholders?