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$$s only activity and that the firm will close one year from today. The firm is obligated to make a $$4,500$ 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:

Economy Probability Low$-$Volatility

Project Payoff High$-$Volatility

Project Payoff

Bad $\mathrm{.}50$ $$4,500$ $$3,900$

Good $\mathrm{.}505,2005,800$

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$.,32.)$

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 raund wour onswers to the nearest whole dollar, e$.$g$.,$

$32.)$

cintich 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$.,32.)$

Answer is complete but not entirely correct.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$.,32.)$