Sunburn Sunscreen has a zero coupon bond issue outstanding with $20,000 face value that matures in one year. The current market value of the firms assets is $20,900. The standard deviation of the return on the firms assets is 26% per year, and the annual riskfree rate is 6% per year, compounded continuously.

Please calculate part C - the previous person didn't calculate it correctly

a) What is the market value of the firms equity and debt?

b) Suppose the firm is considering two mutually exclusive investments. Project A has an NPV of $800, and Project B has an NPV of $1,300. As a result of taking Project A, the standard deviation of the return on the firms assets will increase to 50% per year. If Project B is taken, the standard deviation will fall to 23%. What is the value of the firms equity and debt if Project A is undertaken? If Project B is undertaken?

c) What does the example suggest to you about stockholder incentives?