Sirca Stationary Limited (SSL) has a zero-coupon debt outstanding maturing in two years. The face value of this debt is $100,000. The market value of SSLs total assets has a standard deviation () of 50%, and is currently sitting at $80,000. Risk-free interest rate is 5%.

a) Treat shareholder equity as a call option, what is the value of SSLs shareholder equity? (Hint: use Black-Scholes option pricing model)

b) If SSL decides to immediately halt operations, convert all assets into cash, and invest all cash in government bonds, will shareholders win or lose?

c) Suppose SSL borrows $20,000 new debt to finance a project that has a NPV of zero. The new debt has the same security, seniority and maturity date as the existing debt. Will existing debtholders win or lose in this case?

d) Suppose SSL takes on a new project which has a positive NPV of $20,000. SSL issues preference shares to finance this new project. Will shareholders win or lose in this case?