Sheaves Corporation economists estimate that a good business environment and a bad

business environment are equally likely for the coming year. Management must choose

between two mutually exclusive projects. Assume that the project chosen will be the

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$.,32.)$