Techthings Inc. is a firm that owns several technology stores in the UK. They are considering

opening a new store in South Kensington taking advantage of the proximity to a university

campus.   This project is financed with a zero coupon bond with a market value today of

291.26M.  The bond matures in one year. The project will generate a cash flow in two years

of either 360M with prob. 0.6 or 280M with probability 0.4. The yield to maturity of the

bond is 3% annual. Assume investors are risk neutral.

a) [5 marks] What is the face value of debt?

b) [5 marks] What is the annual return demanded by investors?

c) [5 marks] Explain why the yield to maturity is not the same as the cost of debt (Rd).

d)[5   marks]  Explain   what   are   the   advantages   of   financing   this   project   with   equity   in

opposition to debt (make sure to state your assumptions).