Sunburn Sunscreen has a zero coupon bond issue outstanding with a $12,000 face value that matures in one year. The current market value of the firms assets is $13,800. The standard deviation of the return on the firms assets is 34 percent per year, and the annual risk-free rate is 6 percent per year, compounded continuously. The firm is considering two mutually exclusive investments. Project A has an NPV of $1,500, and Project B has an NPV of $2,300. As the result of taking Project A, the standard deviation of the return on the firms assets will increase to 49 percent per year. If Project B is taken, the standard deviation will fall to 21 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 final 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 final answers to 2 decimal places. (e.g., 32.16))

	Market value
Equity	$
Debt	$

Answer is not

Current market value of the firms assets = $13,800

Total Value of Firm = $13800 a-1 NPV of Project A = $1,500 Total Value of Firm if selects Project A = Current Value + NPV of the new Project = $13800 + $1500 = $15,300 Value of debt = $12000 Value of Equity= Value of Firm -Value of Debt = $15300 - $12000 = $3300 a-2 NPV of Project B = $2300 Total Value of firm if selects project B = Current Value + NPV of the new Project = $13800 + $2300 = $16100 Value of Debt = $12000 Value of Equity = Value of Firm -Value of Debt = $16100 - $12000 = $4,100