Sunburn Sunscreen has a zero coupon bond issue outstanding with a $25,000 face value that matures in one year. The current market value of the firms assets is $27,200. The standard deviation of the return on the firms assets is 34 percent per year, and the annual risk-free rate is 5 percent per year, compounded continuously. The firm is considering two mutually exclusive investments. Project A has an NPV of $2,000, and Project B has an NPV of $2,900. As the result of taking Project A, the standard deviation of the return on the firms assets will increase to 47 percent per year. If Project B is taken, the standard deviation will fall to 28 percent per year.

a-1 What is the value of the firms equity and debt if Project A is undertaken? (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)

Market value Equity $ Debt $

a-2 What is the value of the firms equity and debt if Project B is undertaken? (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)

Market value Equity $ Debt $

b. Which project would the stockholders prefer? Project A or Project B

c. Suppose the stockholders and bondholders are in fact the same group of investors. Would this affect your answer to (b)? Yes or No