Sunburn Sunscreen has a zero coupon bond issue outstanding with a face value of $25,000 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 4 percent per year, compounded continuously. The firm is considering two mutually exclusive investments. Project A has an NPV of $2,300, and Project B has an NPV of $3,100. As the result of taking Project A, the standard deviation of the return on the firms assets will increase to 48 percent per year. If Project B is taken, the standard deviation will fall to 29 percent per year.

a-1. What is the value of the firm's equity and debt if Project A is undertaken?

Equity:

Debt:

a-2 What is the value of the firm's equity and debt if Project B is undertaken?

Equity:

Debt:

b. Which project would the stockholder prefer?

c. Suppose the stockholders and bondholders are in fact the same group of investors, would this affect your answer to b?

a-1.	What is the value of the firms equity and debt if Project A is undertaken?