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Sunburn Sunscreen has a zero coupon bond issue outstanding with a $10,000 face value that matures in one year. The current market value of the
Sunburn Sunscreen has a zero coupon bond issue outstanding with a $10,000 face value that matures in one year. The current market value of the firm's assets is $11,900. The standard deviation of the return on the firm's 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 $1,700, and Project B has an NPV of $2,500. As the result of taking Project A, the standard deviation of the return on the firm's assets will increase to 54 percent per year. If Project B is taken, the standard deviation will fall to 23 percent per year. a-1. What is the value of the firm's 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)) a-2. What is the value of the firm's 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)) b. Which project would the stockholders prefer? Project B Project A c. Suppose the stockholders and bondholders are in fact the same group of investors. Would this affect your answer to (b)
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